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Federal Register / Vol. 77, No. 250 / Monday, December 31, 2012 / Notices
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20549–1090.
All submissions should refer to File
Number SR–BX–2012–075. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549–1090, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
offices of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–BX–
2012–075, and should be submitted on
or before January 22, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–31245 Filed 12–28–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68515; File No. SR–
NASDAQ–2012–137]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing of a Proposed Rule Change and
Amendment No. 1 Thereto to Establish
the Market Quality Program
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December 21, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
22 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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notice is hereby given that on December
7, 2012, The NASDAQ Stock Market
LLC (‘‘NASDAQ’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III, below, which Items
have been prepared by the Exchange.
On December 20, 2012, the Exchange
submitted Amendment No. 1 to the
proposed rule change, which replaces
and supersedes the proposed rule
change in its entirety. The Commission
is publishing this notice to solicit
comments on the proposed rule change,
as modified by Amendment No. 1
thereto, from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
NASDAQ is filing with the
Commission a proposal to add new Rule
5950 (Market Quality Program) to enable
market makers that voluntarily commit
to and do in fact enhance the market
quality (quoted spread and liquidity) of
certain securities listed on the Exchange
to qualify for a fee credit pursuant to the
Exchange’s Market Quality Program and
to exempt the Market Quality Program
from Rule 2460 (Payment for Market
Making). NASDAQ believes this
voluntary program will benefit
investors, issuers or companies, and
market participants by significantly
enhancing the quality of the market and
trading in such listed securities.
The Market Quality Program set forth
in Rule 5950 will be effective for a one
year pilot period beginning from the
date of implementation of the program.
During the pilot, NASDAQ will
periodically provide information to the
Commission about market quality in
respect of the Market Quality Program.
The text of the proposed rule change
is available from NASDAQ’s Web site at
http://nasdaq.cchwallstreet.com/
Filings/, at NASDAQ’s principal office,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NASDAQ included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below.
NASDAQ has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
This Amendment No.1 to SR–
NASDAQ–2012–137 replaces and
supercedes [sic] SR–NASDAQ–2012–
137 in its entirety.3
The purpose of the filing is to propose
new Rule 5950 to enable Market
Makers 4 that enhance the market
quality of certain securities listed on the
Exchange (known as ‘‘targeted
securities’’) and thereby qualify for a fee
credit pursuant to the Market Quality
Program (‘‘MQP’’ or ‘‘Program’’) and to
exempt the Program from Rule 2460.
Proposed Rule 5950 will be effective
for a one year pilot period. The pilot
period will commence when the Market
Quality Program is implemented by the
Exchange and an MQP Company,5 on
behalf of an MQP security, and one or
more related Market Makers are
accepted into the MQP in respect of a
security listed pursuant to the Program
(‘‘MQP Security’’).6 The pilot program
will, unless extended, end one year after
implementation.7 During the pilot, the
3 SR–NASDAQ–2012–137 replaced SR–
NASDAQ–2012–043, which was withdrawn by the
Exchange. See Securities Exchange Act Release Nos.
66765 (April 6, 2012), 77 FR 22042 (April 12,
2012)(SR–NASDAQ–2012–043)(notice of filing);
and 68378 (December 6, 2012), 77 FR 74042
(December 12, 2012)(notice of withdrawal).
Attached hereto is Exhibit 4 that reflects the
changes made to Exhibit 5. The Commission notes
that Exhibit 4 is attached to the filing, not to this
Notice.
4 The term ‘‘Market Maker’’ is defined in Rule
5005(a)(24) as a dealer that, with respect to a
security, holds itself out (by entering quotations in
the NASDAQ Market Center) as being willing to buy
and sell such security for its own account on a
regular and continuous basis and that is registered
as such.
5 The term ‘‘MQP Company’’ is defined in
proposed Rule 5950(e)(5) as the trust or company
housing the Exchange Traded Fund or, if the
Exchange Traded Fund is not a series of a trust or
company, then the Exchange Traded Fund itself.
MQP Fees for MQP Securities will be paid by the
Sponsors associated with the MQP Companies. The
term Sponsor means the registered investment
adviser that provides investment management
services to an MQP Company or any of such
adviser’s parents or subsidiaries.
6 The term ‘‘MQP Security’’ is defined in
proposed Rule 5950(e)(1) as an Exchange Traded
Fund (‘‘ETF’’) security issued by an MQP Company
that meets all of the requirements to be listed on
NASDAQ pursuant to Rule 5705. For the definition
of ETF, see proposed Rule 5950(e)(2).
7 The Exchange believes that, based on
discussions with the Financial Industry Regulatory
Authority (‘‘FINRA’’), FINRA intends to file an
immediately effective rule change that would
exempt from FINRA Rule 5250 exchange programs
that are approved by the Commission. The
Exchange notes that FINRA Rule 5250 does not
preclude the Exchange from any action, but
precludes FINRA members (not all Exchange
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Federal Register / Vol. 77, No. 250 / Monday, December 31, 2012 / Notices
Exchange will periodically provide
information to the Commission about
market quality in respect of the MQP.8
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Background
The proposed Market Quality Program
is a voluntary program designed to
promote market quality in MQP
Securities.9 An MQP Company may list
an eligible MQP Security on NASDAQ
and in addition to the standard (nonMQP) NASDAQ listing fee as set forth
in the Rule 5000 Series (consisting of
Rules 5000–5999),10 a Sponsor may pay
a fee (‘‘MQP Fee’’) in order for the MQP
Company, on behalf of an MQP
Security, to participate in the Program.
The MQP Fee will be credited to
members are FINRA members) from directly or
indirectly accepting payment or consideration from
an issuer of a security for acting as a market maker.
See Securities Exchange Act Release Nos. 60534
(August 19, 2009), 74 FR 44410 (August 28,
2009)(SR–FINRA–2009–036)(order approving
proposal to adopt NASD Rule 2460 without
substantive change into the Consolidated FINRA
Rulebook as Rule 5250); and 38812 (July 3, 1997),
62 FR 37105 (July 10, 1997)(SR–NASD–97–
29)(order approving adoption of NASD Rule 2460;
FINRA Rule 5250 and NASDAQ Rule 2460 are
based on NASD Rule 2460)(the ‘‘1997 order’’).
Being mindful of the concern in the 1997 order
about investor confidence and market integrity, the
Exchange designed the MQP Program to be highly
transparent, with: clear public notification
requirements; clear entry, continuation, and
termination requirements; clear market maker
accountability standards; and, perhaps most
importantly, clear market quality (liquidity)
enhancement standards that benefit investors and
market participants.
The Exchange has a provision in its Rule 2460
that is, in respect of Exchange members, largely
similar to FINRA Rule 5250. See Securities
Exchange Act Release No. 53128 (January 13, 2006),
71 FR 3550 (January 23, 2006)(File No. 10–131)
(order approving registration of The NASDAQ Stock
Market LLC as a national securities exchange and
adopting Rule 2460). As discussed in the body of
the proposal, the Exchange proposes to modify Rule
2460 so that it is not applicable to the MQP.
8 As the Exchange notes in the filing, the goal is
to expand the MQP, if successful, to small cap
stocks that may benefit from liquidity enhancement
and in turn help to promote economic expansion.
To expand the MQP in this fashion, the Exchange
will need to file a new proposed rule change with
the Commission.
9 The Exchange notes that MQP Securities do not
encompass derivatives on such securities.
10 The Rule 5000 Series contains rules related to
the qualification, listing and delisting of Companies
on NASDAQ. The Rule 5100 Series discusses
NASDAQ’s general regulatory authority. The Rule
5200 Series sets forth the procedures and
prerequisites for gaining a listing on NASDAQ, as
well as the disclosure obligations of listed
Companies. The Rule 5300, 5400, and 5500 Series
contain the specific quantitative listing
requirements for listing on the Global Select, Global
Market, and Capital Market, respectively. The
corporate governance requirements applicable to all
Companies are contained in the Rule 5600 Series.
Special listing requirements for securities other
than common or preferred stock and warrants are
contained in the Rule 5700 Series. The
consequences of a failure to meet NASDAQ’s listing
standards are contained in the Rule 5800 Series.
Finally, listing fees are described in the Rule 5900
Series.
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NASDAQ’s General Fund. NASDAQ
will incentivize one or more Market
Makers in the MQP Security (‘‘MQP
Market Maker’’) to enhance the market
quality of the MQP Security. Subject to
the conditions set forth in this rule, out
of its General Fund NASDAQ will credit
(‘‘MQP Credit’’) one or more MQP
Market Makers that make a quality
market in the MQP Security pursuant to
the Program.11 The recipients and the
size of their credits will be determined
solely by NASDAQ pursuant to
objective criteria; issuers will have no
role in selecting the recipients or in
determining the specific amount, if any,
of their credits.
The Need for the MQP
The Exchange believes that the MQP
will be beneficial to the financial
markets, to market participants
including traders and investors, and to
the economy in general. First, the MQP
will encourage narrow spreads and
liquid markets in situations that
generally have not been, or may not be,
conducive to naturally having such
markets. The securities that comprise
these markets may include less actively
traded or less well known ETF products
that are made up of securities of less
well known or start-up companies as
components.12 Second, in rewarding
Market Makers that are willing to ‘‘go
the extra mile’’ to develop liquid
11 The enhanced market quality (e.g. liquidity)
would, as discussed below, emanate from market
quality standards for MQP Market Makers that
include, for example, posting a market in an MQP
Security that is no wider on the offer side and no
wider on the bid side than 2% away from NBBO.
Proposed Rule 5950(c)(1)(B).
Other markets have considered various ways to
increase liquidity in low volume securities. NYSE
Euronext, for example, has advocated that a marketwide pilot program with wider spread increments
for less liquid securities could be a worthwhile
experiment. NYSE Euronext has also recognized
that the creation of a program in which small
companies could enter into agreements directly
with broker-dealers or through exchanges to
provide direct payments to a broker-dealer who
agrees to make a market in the issuer’s security is
an idea that may warrant further review by FINRA
and the Commission. See Testimony of Joseph
Mecane, Executive Vice President, NYSE Euronext,
Before the House Committee on Government
Reform and Oversight, November 15, 2011. See also
Securities Exchange Act Release No. 66966 (May
11, 2012), 77 FR 29419 (May 17, 2012)(SR–
NYSEArca–2012–37)(notice of filing regarding Lead
Market Maker incentive program).
12 These small companies and their securities
(whether components of listed products like ETFs
or direct listings) have been widely recognized as
essential to job growth and creation and, by
extension, to the health of the economy. Being
included in a successful ETF can provide the stocks
of these companies with enhanced liquidity and
exposure, enabling them to attract investors and
access capital markets to fund investment and
growth.
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markets for MQP Securities,13 the MQP
would clearly benefit traders and
investors by encouraging more quote
competition, narrower spreads and
greater liquidity. Third, the MQP will
lower transaction costs and enhance
liquidity in both ETFs and their
components, making those securities
more attractive to a broader range of
investors. In so doing, the MQP will
help companies access capital to invest
and grow. And fourth, the MQP may
attract smaller, less developed
companies and investment
opportunities to a regulated and
transparent market and thereby serve
the dual function of providing access to
on-Exchange listing while expanding
investment and trading opportunities to
market participants and investors.
There is support for paid for market
making (also known as ‘‘PFMM’’) at the
highest governmental levels.
Congressman Patrick McHenry, the
Chairman of the House Committee on
Governmental Reform and Oversight, for
example, recently noted that agreements
between issuers and market makers to
pay for market making activity
‘‘* * *would allow small companies to
produce an orderly, liquid market for
their stocks. Research has shown that
these agreements, already permitted
overseas, have led to a positive
influence on liquidity for small public
companies.’’ 14
In a similar vein, Robert Greifeld,
Chief Executive Officer of The NASDAQ
OMX Group, Inc. (‘‘NASDAQ OMX’’),
has noted that unlike the United States,
‘‘[t]he U.K., Canada and Sweden all
have exchange markets that serve as
‘‘incubators’’ for smaller companies.15
13 By imposing quality quoting requirements to
enhance the quality of the market for MQP
Securities, the MQP will directly impact one of the
ways that Market Makers manage risk in lower tier
or less liquid securities (e.g. the width of bid and
offer pricing).
14 See Payments to Market Makers May Improve
Trading in Smaller Stocks, by Nina Mehta,
Bloomberg, November 15, 2011.
The Exchange believes that by establishing
specific market quality requirements in the MQP to
expand quote competition and liquidity in targeted
securities such as ETFs, the Program will be
conducive to capital formation—not only in the
targeted securities or ETFs (e.g. higher trading
volume and/or creation of additional share units)
but also in the individual components that make up
the targeted securities (e.g. higher share trading
volume). Securities that trade in active, liquid
markets are less likely to suffer from mispricing
(that is, a discount in pricing because of a lack of
liquidity) that can diminish a company’s ability to
raise capital for further investment and growth.
15 See Robert Greifeld, CEO, NASDAQ OMX,
Sarbox and Immigration Reform for Jobs, Wall
Street Journal, October 4, 2011. For a discussion of
capital formation issues in the U.S., see letters
between Mary Shapiro, Chairman of the
Commission and Congressman Darrel E. Issa,
Chairman of the House Committee on Oversight and
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The Exchange believes that the MQP
proposal will, by encouraging liquid
markets, enable the Exchange to
similarly serve as an ‘‘incubator,’’ and to
continue being an innovator in
expanding markets to benefit market
participants, traders, and investors.16
The MQP would reward market makers
for committing capital to securities and
meeting rigorous market quality
benchmarks established by the
Program.17 This approach has worked
very successfully in overseas markets,
including the NASDAQ OMX Nordic
First North market (known as ‘‘First
North’’).
The practice of paid for market
making to increase the liquidity of less
liquid securities was examined by
Johannes A. Skjeltorp and Bernt Arne
Odegaard in a working paper from June
2011.18 Skjeltorp and Odegaard
examined paid for market making on the
Oslo Stock Exchange, which uses a
market making model that is similar to
that of NASDAQ’s First North market,19
and noted that they ‘‘* * * find a
significant reduction in liquidity risk
and cost of capital for firms that hire a
market maker. Firms that prior to hiring
a market maker * * * [have] a high
loading on a liquidity risk factor,
experience a significant reduction in
liquidity risk to a level similar to that of
the larger and more liquid stocks on the
exchange.’’
About six years prior to the Skjeltorp
and Odegaard article, Amber Anand,
Governmental Reform, dated March 22, 2011, April
6, 2011, and April 29, 2011.
16 See Securities Exchange Act Release No. 63270
(November 8, 2010), 75 FR 69489 (November 12,
2010)(NASDAQ–2010–141)(notice of filing and
immediate effectiveness establishing the Investor
Support Program to attract retail order flow to the
Exchange). See also Securities Exchange Act
Release No. 64437 (May 6, 2011), 76 FR 27710 (May
12, 2011)(NASDAQ–2010–059)(approval order
creating a listing market, The BX Venture Market,
that will have strict qualitative listing requirements
and quantitative standards that would attract
smaller, growth companies).
17 See Testimony of Edward S. Knight, General
Counsel and Executive Vice President, NASDAQ
OMX Group, Before the Senate Committee on
Banking, Housing, and Urban Affairs, December 1,
2011.
18 See Why do Firms Pay for Market Making in
Their Own Stock? by Johannes A. Skjeltorp, Norges
Bank, and Bernt Arne Odegaard, University of
Stavanger and Norges Bank, June 2011. See also
Why Designate Market Makers? Affirmative
Obligations and Market Quality by Hendrik
Bessembinder, Jia Hao, and Michael Lemmon, June
2011. This study suggests that future flash crashes
can be avoided and social welfare enhanced by
designating market makers and engaging paid for
market making; and observing the positive
attributes of direct payments from listed firms to
designated market makers on the Stockholm Stock
Exchange and Euronext Paris.
19 The Exchange believes that the Skjeltorp and
Odegaard article is therefore directly applicable to
the First North paid for market making experience.
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Carsten Tanggaard, and Daniel G.
Weaver studied liquidity provision
through paid for market making on the
Stockholm Stock Exchange (‘‘SSE’’),
currently named NASDAQ OMX
Stockholm AB.20 The researchers
examined the success of fifty previously
illiquid firms that were listed on the
SSE and enjoyed, along with investors,
the benefits of paid for market making.
The researchers examined the impact of
the paid market maker program and
found that firms experienced ‘‘* * *a
decreased cost of capital and significant
improvements in market quality and
price discovery.’’ 21 The market makers
were known as liquidity providers and
the firms could set maximum spread
widths for their stocks, as is currently
done. Anand, Tanggaard, and Weaver
found that following the beginning of
paid for market making services,
spreads narrowed by a statistically
significant amount and depth increased
at the inside and in the aggregate for
four price levels away from the inside.
The researchers found that
accompanying the increase in depth was
a significant increase in average trade
size, suggesting that traders did not find
it necessary to break up their orders to
accommodate low market depth. They
also found an increase in trading
activity, suggesting that liquidity
providers were actively trading with
public customers.
More recently, Eric Noll, Executive
Vice President, NASDAQ OMX,
described the positive impact of paid for
market making in the First North
market, a European venue for smaller
companies that has a program enabling
companies to compensate market
makers.22 Mr. Noll stated that NASDAQ
OMX has had ‘‘great success’’ in
increasing liquidity in stocks on First
North, and that in just five years, the
First North market has grown to 141
listings with a total capitalization of 2.8
billion Euros. Twenty-two 22 First
North companies have graduated to the
main market since 2006.23
20 See Paying for Market Quality, Working Paper
F–2006–06 by Amber Anand, Carsten Tanggaard,
and Daniel G. Weaver, November 2005, Aarhus
School of Business.
21 At the time of the study, SSE was owned by
OMX AB. SSE merged into NASDAQ OMX in 2008
and retained its identity within the new corporate
structure. The SSE paid for market making system
matured into the current First North market.
22 See Payments to Market Makers May Improve
Trading in Smaller Stocks, by Nina Mehta,
Bloomberg, November 15, 2011.
23 See Testimony of Eric Noll, Executive Vice
President, NASDAQ OMX Group, Before the House
Committee on Government Reform and Oversight,
November 15, 2011. Mr. Noll noted also that one
of the unintended consequences of market
fragmentation in the current U.S. securities markets
has been a lack of liquidity and price discovery in
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Paid for Market Making on the First
North Market
The Exchange believes that
commensurate with the previouslydiscussed studies regarding paid for
market making,24 it is instructive to
examine the paid for market making
experience on the First North market.
By way of background, the First North
market is an alternative listing market to
the NASDAQ OMX Nordic Main Market
(‘‘Main Market’’).25 Both First North and
Main Market are subject to and
regulated by European Union (‘‘EU’’)
directives26 and exchange rules, and are
supervised and regulated by one or
more Financial Services Authorities
(‘‘FSAs’’).27 While the Main Market is
intended for listing companies that are
well established, First North is intended
for listing small, young or growth
companies (not unlike the beneficiaries
of the MQP) while providing an
infrastructure and trading and
settlement system that is similar to that
of the Main Market. First North offers
new or small public companies the
benefits of listing on a public market
and the potential for good markets
through a paid for market making
system, and is often the first step
towards listing on the Main Market.28
The First North paid for market
making system is based on a standard
exchange-supplied contract between a
listing firm and a designated market
maker (‘‘DMM’’) that sets forth market
obligations for the market maker. The
Exchange sets forth obligations for the
listed securities outside of the top 100 traded
names, and a disturbing absence of market attention
paid to small growth companies by market
participants. The Exchange believes that the MQP
proposal offers a practical and positive solution.
24 See supra notes 18, 19, and 20.
25 NASDAQ OMX Nordic, which has securities
exchanges and clearing operations in the Nordic
countries of Sweden, Denmark, Iceland, and
Finland and Baltic countries of Latvia and Estonia,
operates First North and the Main Market. For
additional information, see http://
www.nasdaqomxnordic.com/
about_us?languageId=1.
26 For example, the Markets in Financial
Instruments Directive (‘‘MiFID’’). It should be noted
that certain parts of the EU legislation, for example
the Transparency Directive, only apply to
companies admitted to trading on the Main Market.
27 A Financial Services Authority or ‘‘FSA’’ is the
regulator of financial services and securities
exchanges in an EU country (including the Nordics)
and as such is similar to the Commission in respect
of involvement in market regulation and oversight.
28 The First North and Main Market have
increasingly higher listing standards, similarly to
the tiered NASDAQ listings markets. See Rule 5300,
5400, and 5500 Series regarding the Global Select,
Global Market, and Capital Market, respectively. In
a similarly tiered fashion, between First North and
Main Market is an intermediary market known as
First North Premiere (a segment of First North) that
is designed to help companies seeking higher
investor visibility and/or preparation for Main
Market listing.
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expansion of liquidity through paid for
market making is the significant
narrowing of bid/ask spreads. This
phenomenon is directly and
immediately beneficial for all market
participants including investors and
listing companies (which may also
benefit from accompanying volume
increase). As depicted in the chart
below, in 2010 and 2011 the Relative
Time Weighted Average Spread
(‘‘RTWAS’’) 29 at First North was
significantly better for securities with
PFMM than for those without the
benefit of PFMM.
The substantial positive advantage
that market participants receive from
PFMM is clearly demonstrated in the
chart below, showing that non-PFMM
security spreads were: (a) Often more
than four times wider than PFMM
security spreads; and (b) a majority of
the time more than three times wider
than PFMM spreads. Moreover, the
spreads for stocks with PFMM were
more stable through time.
A comparison of Relative Time
Weighted Average Spread on First North
shows the significant, consistent impact
of PFMM in narrowing spreads.30 This
directly benefits investors in PFMM
securities by lowering their transaction
costs.31
In terms of regulation, the First North
PFMM experience has not raised
concerns. Based on Exchange
discussions with the Office of General
Counsel at NASDAQ OMX Nordic in
respect of the First North market, the
Exchange is not aware of regulatory
oversight issues (e.g. Swedish FSA or
Danish FSA) in respect of paid for
market making on First North.32
The Exchange believes that the MQP
will, like paid for market making on
First North, achieve positive results.33
The Proposal—Background
29 RTWAS is the bid/ask spread relative to the
stock price calculated at every NBBO change, then
averaged with weights for how long each NBBO
condition lasted.
30 The Exchange believes that the volatility
reflected on the RTWAS chart after August 2011 is
due in large part to economic events in the EU.
31 The Exchange believes that just as First North’s
positive PFMM experience is successful in its own
right, so it is equally positive within the wider
European liquidity enhancement (paid for market
making) experience. See, for example, How Do
Designated Market Makers Create Value for SmallCaps? by Albert J. Menkveld and Ting Wang,
August 1, 2011. This analysis of the 2001 Euronext
system roll-out to the Amsterdam market, where
small-caps had the opportunity to hire a DMM who
guaranteed a minimum liquidity supply in their
stock, found an improvement in liquidity level and
a reduction in liquidity risk. See also Designated
¨
Sponsors and Bid-Ask Spreads on Xetra by Jordis
Hengelbrock, October 31, 2008. This analysis of
¨
Deutsche Borse Group’s Xetra program that began
in the 1990s, where issuers of less liquid stocks
could contract with a Designated Sponsor to
provide liquidity in a stock for a fee, found that
investor costs including spreads were lower for
those stocks that had at least one such dedicated
Designated Sponsor.
32 Moreover, the Exchange notes that while
spreads widened for stocks on all markets around
the world during the height of the financial crisis
in September and October 2008, First North stocks
with PFMM experienced less spread widening than
comparable stocks without PFMM.
33 The Exchange believes that even though First
North market lists equities while the proposed MQP
market would emphasize listing ETF products, this
does not detract from, and indeed enhances, the
comparability of the First North PFMM experience
to MQP. See infra note 36 (discussing the potential
benefit of the unique trust structure of ETFs).
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The Exchange believes that this
proposal would help raise investor and
issuer confidence in the fairness of their
transactions and the markets in general
by enhancing market maker quote
competition in securities on the
Exchange, narrowing spreads,
increasing shares available at the inside,
reducing transaction costs, supporting
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MQP Market Makers (as well as MQP
Companies) in proposed Rule 5950 in
the belief that this provides the greatest
amount of transparency, and
accountability, for all that wish to
participate in the MQP.
The paid for market making model on
NASDAQ’s First North has operated
since 2002 and has been demonstrably
successful to the benefit of issuers and
investors, without material regulatory
issues. One of the definitive market
quality attributes associated with
Federal Register / Vol. 77, No. 250 / Monday, December 31, 2012 / Notices
77145
eligible to remain in the MQP if the
security sustains an average daily
trading volume (consolidated trades in
all U.S. markets) (‘‘ATV’’) of one million
shares or more for three consecutive
months. While the Exchange originally
proposed a two million shares threshold
in the withdrawn MQP proposal at SR–
NASDAQ–2012–043, it is scaling back
the threshold to one million shares to
better provide NASDAQ and the
Commission with an opportunity to
observe the impact, if any, on MQP
Securities that exceed the threshold and
‘‘graduate’’ from the Program. The
Exchange has compiled statistics
indicating that ‘‘graduation’’ from the
Program may occur more frequently at
a one million threshold than a two
million threshold:
enhancement. The Exchange believes
that while this would benefit small cap
MQP products and investors as well as
overall market liquidity, perhaps even
more importantly it would serve to help
economic expansion and the economy
as a whole.41
34 The Commission has recognized the strong
policy preference under the Act in favor of price
transparency and displayed markets. See Securities
Exchange Act Release No. 61358 (January 14, 2010),
75 FR 3594 (January 21, 2010) (Concept Release on
Equity Market Structure).
To that end, the Exchange has recently put into
place initiatives designed to expand the liquidity of
certain targeted securities on transparent and
displayed markets on the Exchange. See, for
example, Securities Exchange Act Release No.
63270 (November 8, 2010), 75 FR 69489 (November
12, 2010)(SR–NASDAQ–2010–141)(notice of filing
and immediate effectiveness of proposal to establish
Investor Support Program in respect of retail or
natural order flow).
35 The Exchange notes that foreign (non-U.S.)
ETFs, particularly those that are derivative-based,
may have certain negative characteristics that are
not present in U.S. ETFs. In some cases, under the
Undertakings for Collective Investment in
Transferable Securities (UCITS, Europe’s equivalent
of the Investment Company Act of 1940 (‘‘1940
Act’’)) structure, individual firms are permitted to
fulfill multiple roles within the construct of the
product’s trading and or creation/redemption
process (e.g. the Sponsor/Issuer of a European ETF
could be the same entity as the market maker,
distributor, intraday Net Asset Value (‘‘NAV’’)
calculation agent, custodian bank and/or
counterparty to any underlying asset). Under the
1940 Act, this is not permitted.
36 It has been noted that since the prices of ETFs
are generally linked back to the underlying
securities, there is less opportunity for
manipulation. See Payments to Market Makers May
Improve Trading in Smaller Stocks, by Nina Mehta,
Bloomberg, November 15, 2011. To that end, the
Exchange notes that by definition an ETF will have
an insulating wall between Market Maker and
product, namely a trust structure—which is not
present with other products such as equity
securities—that establishes the daily NAV for an
ETF. NAV reflects the per-share value of an ETF,
which is based upon the performance of a fund’s
underlying components and methodology.
37 See Testimony of Eric Noll, Executive Vice
President, NASDAQ OMX, Before the Securities
Subcommittee of the Senate Banking Committee
October 19, 2011 (‘‘I can tell you from personal
experience that the companies that make up QQQ
[(the NASDAQ–100 technology ETF)] consider it a
real achievement, and certainly NASDAQ is proud
of the excellence QQQ represents.’’).
In addition, the Exchange believes that
purchasers of ETFs that find success because of
increased market quality (especially where such
ETFs are smaller or niche funds with fewer
components) may choose to invest directly in the
fund components after a positive ETF market
quality and execution experience.
38 See Testimony of Eric Noll, Executive Vice
President, NASDAQ OMX, Before the House
Committee on Government Reform and Oversight,
November 15, 2011.
39 There are a record 377 funds (273 ETFs and 104
ETNs) on the August 2012 ‘‘ETF Deathwatch’’ list
maintained by Ron Rowland, president of Capital
Cities Asset Management. All the funds on this list
have limped along for at least three months with
less than $5 million in assets or fewer than
$100,000 worth of shares changing hands daily. The
list now includes about 17% of the industry’s
approximately 1,400 ETFs and exchange-traded
notes, as measured by number of funds. Mr.
Rowland states: ‘‘The largest risk is not, however,
that [the funds] may close in the future. No, the
more notable risk is that they suffer from extremely
poor liquidity today. Wide bid/ask spreads, little to
no volume behind the quotes, and sleeping market
makers can potentially inflict much more damage
on unknowing investors than a fund closure.’’
Perhaps the most astonishing statistic, which
clearly shows the critical need for a rules-based
liquidity-enhancement program such as the MQP, is
that ETF Deathwatch list surged 131% in the past
year.
40 Subsection (a)(1)(C)(iv) of Proposed Rule 5950
indicates that the Exchange will post on its Web site
a general description of the Program as
implemented on a pilot basis and a fair and
balanced summation of the potentially positive
aspects of the Program (e.g. enhancement of
liquidity and market quality in MQP Securities) as
well as the potentially negative aspects and risks of
the Program (e.g. possible lack of liquidity and
negative price impact on MQP Securities that
withdraw or are terminated from the Program), and
indicates how interested parties can get additional
information about products in the Program.
41 This is clearly consistent with recent legislative
action designed to create job opportunities and
promote economic expansion, such as the Jumpstart
Our Business Startups Act (JOBS Act).
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based, also benefit listed companies. By
being included in a single, diversified
security, companies gain access to a
greater audience of investors who may
not have bought the individual stock.37
This means that the markets are deeper
and more liquid, benefiting not only
investors but the economy as a whole.38
This proposal will allow ETFs that may
not otherwise see much trading or
volume39 to be listed and traded on the
Exchange in more liquid markets.40 In
that this proposal is designed to provide
market quality support to smaller, less
frequently traded segments of securities
(ETFs), subsection (d) of proposed Rule
5950, which catalogues the reasons for
termination of the MQP and is
discussed at length below, indicates that
an MQP Security will no longer be
Moreover, while the MQP pilot is
structured to initially apply only to
ETFs, the goal is to expand the MQP, if
successful, to small cap stocks and other
similar products that may need liquidity
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the quality of price discovery, and
promoting market transparency.34
As noted, the proposal would
enhance the market quality of targeted
securities, particularly ETFs. The
Exchange believes that ETFs offer great
value to retail and institutional
investment communities, as reflected in
their popularity as investment vehicles
both in the U.S. and abroad.35 ETFs
offer transparency, liquidity,
diversification, cost efficiency and
investment flexibility to gain broad
market exposure or to express a
directional view as a core or satellite
component to one’s investment
portfolio; and do so while offering
investment exposure to all asset
classes—many of which would
otherwise be inaccessible.36 Moreover,
ETFs, particularly those that are equity
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The Proposal—Specifics
mstockstill on DSK4VPTVN1PROD with
Proposed Rule 2460
Preliminarily, the Exchange is
proposing to modify its Rule 2460,
which prohibits direct or indirect
payment by an issuer to a Market Maker,
to indicate that Rule 2460 is not
applicable to the MQP.42 Specifically,
the Exchange is proposing new IM–
2460–1 (Market Quality Program) 43 to
state that Rule 2460 is not applicable to
a member that is accepted into the
Market Quality Program pursuant to
Rule 5950 or to a person that is
associated with such member for their
conduct in connection with that
program. The Exchange believes that
this proposed limited clarification is
proper in that it allows the MQP to go
forward on a pilot basis without
denigrating the basic premise of Rule
2460, which was designed to forestall
problematic relationships between
exchange members (e.g. market makers)
and issuers. The Exchange’s proposal
sets forth an extensive rule-based
process with clear Program
requirements for issuers (MQP
Companies) and clear market quality
requirements for members (MQP Market
Makers) that can only be effected in a lit
and highly regulated exchange
environment.
In the order approving NASD Rule
2460 (the 1997 order), upon which
NASDAQ Rule 2460 is based (as is
FINRA Rule 5250), the Commission
discussed that NASD Rule 2460
preserved investor confidence,
preserved the integrity of the
marketplace, and established a clear
standard of practice for member firms.44
42 See Securities Exchange Act Release No. 53128
(January 13, 2006), 71 FR 3550 (January 23,
2006)(File No. 10–131)(order approving registration
of The NASDAQ Stock Market LLC as a national
securities exchange and adopting Rule 2460).
FINRA, with whom the Exchange has an agreement
regarding provision of certain regulatory services,
has a similar provision in FINRA Rule 5250. As
discussed, the Exchange believes that FINRA
intends to file an immediately effective rule change
that would exempt from FINRA Rule 5250
Exchange programs that are approved by the
Commission.
43 IM reflects interpretive material to an Exchange
rule.
44 See Securities Exchange Act Release No. 38812
(July 3, 1997), 62 FR 37105 (July 10, 1997)(SR–
NASD–97–29)(order approving adoption of NASD
Rule 2460). In discussing the 1997 order, the
Commission cited to NASD Notice to Members 75–
16 (February 20, 1975); see also the letter from
Kenneth S. Spirer, Attorney, Division of Market
Regulation, SEC, to Mr. Jack Rubens, Monroe
Securities, Inc. (May 4, 1973)(regarding acceptance
of a fee or service charge from issuers in connection
with making a market). See also Securities
Exchange Act Release No. 39670 (February 25,
1998), File No. S7–3–98, 63 FR 9661)(notice for
public comment of proposed amendments to Rule
15c2–11 under the Act in response to increasing
incidents of fraud and manipulation in the OTC
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The Exchange designed the MQP to
meet the goals of market integrity,
investor confidence, and clear member
standards as discussed in the 1997
order. In particular, the Exchange
designed the MQP to have precise
standards for all MQP Market Makers in
the Program and to be highly
transparent with clear public
notification requirements; with clear
entry, continuation, and termination
requirements; with clear Market Maker
accountability standards; and, perhaps
most importantly, with clear market
quality (liquidity) enhancement
standards that benefit investors and
market participants. Additionally,
NASDAQ has ensured that issuers are
unable to influence the selection or
retention of MQP Market Makers, or the
amount of incentive credits that any
particular Market Maker receives from
NASDAQ. The positive aspects of the
MQP are objective, clear and
unambiguous.45
First, the entire MQP is clearly and
accurately set forth in proposed Rule
5950. This includes the application and
withdrawal process, the listing fee and
credit structure, the market quality
standards that an MQP Market Maker
must meet and maintain to secure an
MQP Credit, and the Program
termination process. Second, the
Exchange will provide notification on
its public Web site regarding the
variable aspects of the Program.
Specifically, this notification will
include: the names of the MQP
Companies and the MQP Market Makers
that are accepted into the Program; how
many MQP Securities an MQP Company
may have in the Program; the specific
names of the MQP Securities that are
listed pursuant to the Program; the
identity of the MQP Market Makers in
each MQP Security; and the amount of
the supplemental MQP Fee, if one is
established by an MQP Company in
securities market involving thinly traded securities
of thinly-capitalized issuers, known as microcap
securities)(the ‘‘15c2–11 proposal’’). In the 15c2–11
proposal, the Commission cited NASD Rule 2460
when discussing that microcap fraud often involves
‘‘pump and dump’’ operations, in which
unscrupulous brokers sell the securities of lessseasoned issuers to retail customers by using high
pressure sales tactics and a supply of securities
under the firm’s control.
45 In addition to the clear and unambiguous MQP
market quality standards promoting tighter markets
and increased liquidity to the benefit of market
participants, it has been demonstrated that alreadyestablished paid for market making programs in
Europe have resulted in a significant and sustained
reduction in spreads. As an example, securities that
enjoyed PFMM in NASDAQ’s First North’s market
have spreads that are as much as four times
narrower, and are more stable, than securities
without PFMM. See supra notes 31, 32, and 33 and
related text. Narrower spreads benefit investors by
lowering their transaction costs.
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addition to the basic MQP Fee, as
discussed below. Third, MQP Securities
will be traded on a highly regulated and
transparent exchange, namely
NASDAQ, pursuant to the current
trading and reporting rules of the
Exchange, and pursuant to the
established market surveillance and
oversight procedures of the Exchange.
And fourth, the MQP would encourage
narrower spreads and better market
quality (more liquid markets) for
securities that generally have not been,
or may not be, conducive to naturally
having such markets. The Exchange
believes that these factors, which
directly benefit all market participants
and investors, are instrumental to
developing strong investor confidence
in the MQP and the integrity of the
market.
Moreover, the Exchange believes that
the MQP does not implicate conflicts of
interest. That is, unlike the situation
that the NASD was trying to address in
its Rule 2460 or NASD Notice to
Members 75–16, where issuers had the
ability to directly pay a market maker to
illegally pump up the price of an
issuer’s stock, the proposed MQP does
not encourage MQP Market Makers to
improperly pump up prices nor, for that
matter, establish any direct financial
connection between MQP Market
Makers and MQP Companies. First, an
MQP Company must go through an
MQP application process, and the
Exchange must accept the MQP
Company into the Program, before an
MQP Company can list a product
pursuant to the Program.46 Second, an
MQP Market Maker must go through a
separate MQP application process, and
the Exchange must accept an MQP
Market Maker into the Program, before
an MQP Market Maker can make a
market in a product listed pursuant to
the Program.47 NASDAQ will operate
both of these application processes as an
independent regulator, preventing either
issuers or market makers from
improperly influencing the ultimate
outcome. Third, in terms of flow of
funds, the Program is constructed so
that the only way that an MQP Market
Maker can earn an MQP Credit—the
payment of which is administered
solely by the Exchange—is to maintain
46 Moreover, an MQP Company approved to be in
the Program must meet both the non-MQP initial
and continued listing standards (e.g. Rules 5300,
5400, 5500) and the MQP initial and continued
listing standards to list a security pursuant to the
MQP.
47 Moreover, an MQP Market Maker must be
approved to be a member on NASDAQ to be eligible
for the MQP, and thereafter must attain the general
market making requirements (e.g. Rule 4613) and
the specific MQP market quality standards to be
able to attain an MQP Credit.
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a quality market in terms of the spread
and liquidity of an MQP Security.48 The
Program does not afford any other way
for an MQP Market Maker to earn an
MQP Credit. If an MQP Market Maker
does not earn an MQP credit, the MQP
Fee remains in NASDAQ’s General
Fund. Fourth, in contrast to the
extensive benefits of the MQP, the
participation of an MQP Company in
the Program is substantially limited by
design. In this regard, an MQP Company
is limited to making only the following
determinations regarding the Program:
whether to participate in the Program;
what MQP Security should be in the
Program; when the MQP Security
should exit the Program; and the level
of Supplemental Fees, if any, that
should be applied. The MQP Company
can never choose an MQP Market
Maker, nor influence how, when, or the
specific amount that an MQP Market
Maker receives as credit for making a
market in an MQP Security; these
functions are performed solely by the
Exchange according to standards set
forth in the Program.49 The Exchange
firmly believes that the clear,
unambiguous, and transparent nature of
the Program and its established market
quality standards are counter- indicative
of any inherent conflict of interest.50
Additionally, the Exchange notes that
the MQP is proposed initially as a pilot
program. This is significant for several
reasons. First, NASDAQ is proposing
the pilot as an attempt to repair a gap
in market structure, namely the
challenge of certain small or start-up
securities lacking access to quality
markets with adequate liquidity.51
48 One of the eligibility criteria for an MQP
Market Maker to receive an MQP Credit, for
example, is that the MQP Market Maker must
maintain at least 2,500 shares of attributable,
displayed posted liquidity on the NASDAQ Market
Center that are priced no wider on the offer side
and no wider on the bid side than 2% away from
NBBO. Proposed Rule 5950(c)(1)(B).
Moreover, NASDAQ notes, regarding the flow of
funds, that the Exchange stands between an MQP
Company and an MQP Market Maker; an MQP
Company cannot and does not, under any
circumstances, directly pay any funds to an MQP
Market Maker.
49 Indeed, the Exchange will not pay an MQP
Market Maker pursuant to the Program for making
a market in an MQP Security; rather, the Exchange
will pay an incentive out of its General Fund if—
and only if—an MQP Market Maker achieves very
specific, rules-based market quality objectives when
otherwise making a market.
50 The Exchange notes that the MQP as proposed
(e.g. fully transparent and with clear market quality
standards) would not be susceptible to the ‘‘pump
and dump’’ fraud and manipulation schemes noted
in the 15c2–11 proposal. See also supra note 36
discussing that ETFs afford less opportunity for
manipulation and that the ETF trust structure acts
as an insulating wall between market maker and
product.
51 These securities may include less actively
traded or less well known ETF products that have
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Second, the Exchange has agreed, as
part of the MQP pilot, to submit
periodic reports to the Commission
about market quality in respect of the
MQP. These reports will endeavor to
compare, to the extent practicable,
securities before and after they are in
the MQP. The reports will provide
information regarding, for example,
volume metrics, number of MQP Market
Makers in target securities, and spread
size; and will help the Commission and
NASDAQ to evaluate the efficacy of the
Program. The Exchange will endeavor to
provide similar data to the Commission
about comparable ETFs that are listed
on the Exchange that are not in the
MQP. And third, if the Exchange desires
to expand the pilot program or make the
MQP permanent, the Exchange will
need to file a new proposed rule change
with the Commission.
The Exchange believes that the MQP
proposal would help raise investor and
issuer confidence in the fairness of their
transactions and the markets in general
by enhancing market maker quote
competition in securities on the
Exchange, narrowing spreads,
increasing shares available at the inside,
reducing transaction costs, supporting
the quality of price discovery, and
promoting market transparency.
Proposed Rule 5950—Securities Eligible
for the MQP
The MQP is available to Companies 52
that choose to list certain MQP
Securities on the Exchange. To be
eligible for listing, MQP Securities must
meet the requirements to be listed on
NASDAQ as an ETF pursuant to Rule
5705.53 In addition, the MQP Security
must meet all NASDAQ requirements
for continued listing during the period
of time that the MQP Security is in the
MQP.54
Proposed Rule 5950—Application and
Withdrawal
The first step for an entity wishing to
participate in the MQP by listing a
security on the Exchange, and for a
Market Maker wishing to participate in
the MQP as an MQP Market Maker, is
to submit an MQP application to the
Exchange.55 Once the Exchange
less well known or start-up companies as
components.
52 The term Company is defined in Rule
5005(a)(6).
53 See proposed Rule 5950(e)(1) and
5950(b)(1)(B).
54 Proposed Rule 5950(b)(1)(C).
55 See Proposed Rule 5950(a). Thus for an MQP
Company, on behalf of an MQP Security, to
participate in the Program, and for an MQP Market
Maker to be eligible to receive an MQP Credit for
his market making activities, the Exchange must
have accepted the application of each of these
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77147
determines that the MQP Company and
the MQP Market Maker are eligible to be
in the MQP according to the parameters
of the proposed rule, the Exchange will
indicate acceptance to the MQP
Company and the MQP Market Maker.
NASDAQ will provide notification on
its Web site regarding acceptance of an
MQP Company, on behalf of an MQP
Security, and an MQP Market Maker
into the Program.56 NASDAQ may, on a
Program-wide basis, limit the number of
MQP Securities that any one MQP
Company may have in the MQP; any
limitation would be uniformly applied
to all MQP Companies.57 In determining
to limit the number of MQP Securities
per MQP Company in the MQP,
NASDAQ may consider information that
it believes will be of assistance to it,
such as whether a restriction, if any, is
in the best interest of NASDAQ, the
MQP Company and the goals of the
MQP, and investors.58
Moreover, to further enhance the
transparency of the Program, proposed
Rule 5950(a)(1)(C) indicates that
NASDAQ will also provide notification
on its Web site regarding the following:
the total number of MQP Securities that
any one MQP Company may have in the
Program; and the names of MQP
Securities that are listed on NASDAQ
and the MQP Market Maker(s) in each
listed MQP Security, and the dates that
an MQP Company, on behalf of an MQP
Security, commences participation in
and withdraws or is terminated from the
Program.59
parties in respect of an MQP Security, and the
parties must each have fulfilled their obligations
pursuant to the MQP. Proposed Rule 5950 (b)(1)
and (c)(1).
56 Proposed Rule 5950(a)(1)(C).
57 NASDAQ may also, on a Program-wide basis,
limit the number of MQP Market Makers permitted
to register in an MQP Security. NASDAQ will
provide notification on its Web site of any such
limit. If a limit is established, NASDAQ will
allocate available MQP Market Maker registrations
in a first-come-first-served fashion based on
successful completion of an MQP Market Maker
application. Proposed Rule 5950(c)(3).
58 Proposed Rule 5950 (a)(1)(A) and (B). Factors
that may be considered by the Exchange are set
forth in subsection (a)(1)(B)(i) and include, but are
not limited to, the following: the current and
expected liquidity characteristics of MQP
Securities; the projected initial and continuing
market quality needs of MQP Securities; and the
trading characteristics of MQP Securities (e.g.
quoting, trading, and volume).
59 See also proposed Rule 5950(a)(1)(C)(iv),
whereby the Exchange will include on its Web site
a general statement about the MQP that sets forth
the potentially positive and negative aspects of the
Program.
And per proposed Rule 5950(b)(1)(D), during
such time that an MQP Company lists an MQP
Security, the MQP Company must, on a productspecific Web site for each product, indicate that the
product is in the MQP and provide the link to the
Exchange’s MQP Web site.
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An MQP Company, on behalf of an
MQP Security, and an MQP Market
Maker may choose to withdraw from the
Program. After an MQP Company, on
behalf of an MQP Security, is in the
MQP for six consecutive months but
less than one year, it may voluntarily
withdraw from the MQP on a quarterly
basis. The MQP Company must notify
NASDAQ in writing not less than one
month prior to withdrawing from the
MQP. NASDAQ may determine,
however, to allow an MQP Company to
withdraw from the MQP earlier.60 After
an MQP Company, on behalf of an MQP
Security, is in the MQP for one year or
more, it may voluntarily withdraw from
the MQP on a monthly basis. The MQP
Company must notify NASDAQ in
writing one month prior to
withdrawing.61 After an MQP Market
Maker is in the MQP for not less than
one quarter, he may withdraw from the
MQP on a quarterly basis. The MQP
Market Maker must, similarly to an
MQP Company, notify NASDAQ in
writing one month prior to
withdrawing.62
After an MQP Company, on behalf of
an MQP Security, is in the MQP for one
year, the MQP and all obligations and
requirements of the Program will
automatically continue on an annual
basis unless NAQSAQ terminates the
Program by providing not less than one
month prior notice of intent to terminate
or the pilot Program is not extended or
made permanent pursuant to a proposed
rule change subject to filing with or
approval by the Commission under
Section 19(b) of the Exchange Act; the
MQP Company withdraws from the
Program pursuant to subsection (a)(2) of
this rule; or the MQP Company is
terminated from the Program pursuant
to subsection (d) of Proposed Rule
5950.63
60 In making this determination, NASDAQ may
take into account the volume and price movements
in the MQP Security; the liquidity, size quoted, and
quality of the market in the MQP Security; and any
other relevant factors. Proposed Rule 5950(a)(2)(A).
61 Proposed Rule 5950(a)(2)(B).
62 Proposed Rule 5950(a)(2)(C). In addition, per
proposed Rule 5950(a)(2)(D), NASDAQ will provide
notification on its Web site when it receives
notification that an MQP Company, on behalf of an
MQP Security, or MQP Market Maker intends to
withdraw from the Program, and the date of actual
withdrawal or termination from the Program.
63 Proposed Rule 5950(a)(2) and (a)(3). Proposed
Rule 5950 (d) states that the MQP will terminate in
respect of an MQP Security under the following
circumstances:
(A) An MQP Security sustains an average daily
trading volume (consolidated trades in all U.S.
markets) (‘‘ATV’’) of one million shares or more for
three consecutive months;
(B) An MQP Company, on behalf of an MQP
Security, withdraws from the MQP, is no longer
eligible to be in the MQP pursuant to this rule, or
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Proposed Rule 5950—MQP Fees
An MQP Company seeking to
participate in the MQP shall incur an
annual basic MQP Fee of $50,000 per
MQP Security. The basic MQP Fee must
be paid to NASDAQ prospectively on a
quarterly basis.64
An MQP Company may also incur an
annual supplemental MQP Fee per MQP
Security. The basic MQP Fee and
supplemental MQP Fee when combined
may not exceed $100,000 per year. The
supplemental MQP Fee is a fee selected
by an MQP Company on an annual
basis, if at all. The supplemental MQP
Fee must be paid to NASDAQ
prospectively on a quarterly basis. The
amount of the supplemental MQP Fee,
if any, will be determined by the MQP
Company initially per MQP Security
and will remain the same for the period
of a year. NASDAQ will provide
notification on its Web site regarding
the amount, if any, of any supplemental
MQP Fee determined by an MQP
Company per MQP Security.65
The MQP Fee is in addition to the
standard (non-MQP) NASDAQ listing
fee applicable to the MQP Security and
does not offset such standard listing
fee.66 NASDAQ will bill prospectively
each MQP Company for the quarterly
MQP Fee for each MQP Security. MQP
Fees (basic and supplemental) will be
credited to the NASDAQ General
Fund.67
Proposed Rule 5950—MQP Credit to
Market Makers
When making a market in an MQP
Security, an MQP Market Maker must,
in addition to fulfilling the market
making obligations per Rule 4613,68
its Sponsor ceases to make MQP Fee payments to
Nasdaq;
(C) An MQP Security is delisted or is no longer
eligible for the MQP;
(D) An MQP Security does not have at least one
MQP Market Maker for more than one quarter; or
(E) An MQP Security does not, for two
consecutive quarters, have at least one MQP Market
Maker that is eligible for MQP Credit.
Moreover, subsection (d) states that MQP Credits
remaining upon termination of the MQP in respect
of an MQP Security will be distributed on a pro rata
basis to the MQP Market Makers that made a market
in such MQP Security and were eligible to receive
MQP Credit pursuant to this rule; and that
termination of an MQP Company, MQP Security, or
MQP Market Maker does not preclude the Exchange
from allowing re-entry into the Program where the
Exchange deems proper.
64 Proposed Rule 5950(b)(2)(A).
65 Proposed Rule 5950(b)(2)(B).
66 Proposed Rule 5950(b)(2)(C). The MQP Fee in
respect of an ETF shall be paid by the Sponsor(s)
of such ETF.
67 Proposed Rule 5950(b)(2)(D) and (E).
68 Rule 4613 states that market making obligations
applicable to NASDAQ members that are registered
as Market Makers include, among other things,
quotation requirements and obligations as follows:
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meet or exceed several market quality
requirements on a monthly basis to be
eligible for an MQP Credit. First, for at
least 25% of the time when quotes can
be entered in the Regular Market
Session 69 as averaged over the course of
a month, an MQP Market Maker must
maintain: a) at least 500 shares of
attributable, displayed quotes 70 or
orders at the NBBO or better on the bid
side of an MQP Security; and b) at least
500 shares of attributable, displayed
quotes or orders at the NBBO or better
on the offer side of an MQP Security.
And second, for at least 90% of the time
when quotes can be entered in the
Regular Market Session as averaged over
the course of a month, a MQP Market
Maker must maintain: (a) At least 2,500
shares of attributable, displayed posted
liquidity on the NASDAQ Market Center
that are priced no wider than 2% away
from the NBBO on the bid side of an
MQP Security; and (b) at least 2,500
shares of attributable, displayed posted
liquidity on the NASDAQ Market Center
that are priced no wider than 2% away
from the NBBO on the offer side of an
MQP Security.71
For each security in which a member is registered
as a Market Maker, the member shall be willing to
buy and sell such security for its own account on
a continuous basis during regular market hours and
shall enter and maintain a two-sided trading
interest (‘‘Two-Sided Obligation’’) that is identified
to the Exchange as the interest meeting the
obligation and is displayed in the Exchange’s
quotation montage at all times. Interest eligible to
be considered as part of a Market Maker’s TwoSided Obligation shall have a displayed quotation
size of at least one normal unit of trading (or a larger
multiple thereof); provided, however, that a Market
Maker may augment its Two-Sided Obligation size
to display limit orders priced at the same price as
the Two- Sided Obligation. Unless otherwise
designated, a ‘‘normal unit of trading’’ shall be 100
shares. After an execution against its Two-Sided
Obligation, a Market Maker must ensure that
additional trading interest exists in the Exchange to
satisfy its Two-Sided Obligation either by
immediately entering new interest to comply with
this obligation to maintain continuous two-sided
quotations or by identifying existing interest on the
Exchange book that will satisfy this obligation.
69 The term ‘‘Regular Market Session’’ shall have
the meaning given in Rule 4120(b)(4)(D). Proposed
Rule 5950(e)(6).
70 These are quotes that are attributable to
members and not hidden quotes.
71 Proposed Rule 5950(c)(1)(B).
For example, regarding the first market quality
standard (25%)—in an MQP Security where the
NBBO is $25.00 x $25.10, for a minimum of 25%
of the time when quotes can be entered in the
Regular Market Session as averaged over the course
of a month, an MQP Market Maker must maintain
bids at or better than $25.00 for at least 500 shares
and must maintain offers at or better than $25.10
for at least 500 shares. Thus, if there were 20
trading days in a given month and the MQP Market
Maker met this requirement 20% of the time when
quotes can be entered in the Regular Market Session
for 10 trading sessions and 40% of the time when
quotes can be entered in the Regular Market Session
for 10 trading sessions then the MQP Market Maker
would have met the requirement 30% of the time
in that month.
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MQP Credits for each MQP Security
will be calculated monthly and credited
quarterly on a pro rata basis to one or
more eligible MQP Market Makers 72 out
of the Exchange’s General Fund. Each
MQP Credit will be allocated 50% to a
Quote Share Payment that is based on
Qualified Quotes, and 50% to a Trade
Share Payment that is based on
Qualified Trades.73 Trade Share
Payments will, as discussed, be based
upon the total aggregate share amount of
Qualified Trades in an MQP Security
executed on the NASDAQ Market
Center; 74 and Quote Share Payments
will be based in equal proportions on:
(a) Average quoted size at or better than
NBBO, and (b) average time spent
quoting at or better than NBBO.75
An MQP Credit will be credited
quarterly to an MQP Market Maker on
a pro rata basis for each month during
such quarter that an MQP Market Maker
is eligible to receive a credit pursuant to
the proposed rule. However, the
calculation to establish the eligibility of
an MQP Market Maker will be done on
a monthly basis. Thus, for example, if
during a quarter an MQP Market Maker
was eligible to receive a credit for two
out of three months, he would receive
a quarterly pro rata MQP Credit for
those two months.76
NASDAQ may limit, on a Programwide basis, how many MQP Market
Makers are permitted to register in an
MQP Security, and will provide
notification on its Web site of any such
limitation. As discussed above, if a limit
is established, NASDAQ will allocate
available MQP Market Maker
For example, regarding the second market quality
standard (90%)—in an MQP Security where the
NBBO is $25.00 x $25.10, for a minimum of 90%
of the time when quotes can be entered in the
Regular Market Session as averaged over the course
of a month, an MQP Market Maker must post bids
for an aggregate of 2,500 shares between $24.50 and
$25.00, and post offers for an aggregate of 2,500
shares between $25.10 and $25.60. Thus, if there
were 20 trading days in a given month and the MQP
Market Maker met this requirement 88% of the time
when quotes can be entered in the Regular Market
Session for 10 trading sessions and 98% of the time
when quotes can be entered in the Regular Market
Session for 10 trading sessions then the MQP
Market Maker would have met the requirement
93% of the time in that month.
72 NASDAQ may accept multiple MQP Market
Makers into the Program. Proposed Rule
5950(c)(1)(A).
73 Proposed Rule 5950(c)(2)(A). This subsection
indicates that a Qualified Quote represents
attributable and displayed liquidity (either quotes
or orders) in an MQP Security; that a quote or order
entered by an MQP Market Maker in an MQP
Security is only a Qualified Quote if it is posted
within 2% of the NBBO; and that a Qualified Trade
in an MQP Security represents a liquidity-providing
execution of a Qualified Quote on the NASDAQ
Market Center.
74 Proposed Rule 5950(e)(4).
75 Proposed Rule 5950(c)(2)(B).
76 Proposed Rule 5950(c)(2)(C).
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registrations in a first-come-first-served
fashion based on successful completion
of an MPQ Market Maker application.77
Finally, to give the Exchange and the
Commission an opportunity to evaluate
the impact of the MQP on the quality of
markets in MQP Securities, the
Exchange is proposing that the MQP
will be effective for a one year pilot
period. During the pilot period, the
Exchange will submit monthly reports
to the Commission about market quality
in respect of the MQP. The monthly
reports will endeavor to compare, to the
extent practicable, securities before and
after they are in the MQP and will
include information regarding the MQP
such as: (1) Rule 605 metrics; 78 (2)
volume metrics; (3) number of MQP
Market Makers in target securities; (4)
spread size; and (5) availability of shares
at the NBBO. The Exchange will
endeavor to provide similar data to the
Commission about comparable ETFs
that are listed on the Exchange that are
not in the MQP; and any other MQPrelated data requested by the
Commission for the purpose of
evaluating the efficacy of the MQP. The
Exchange will post the monthly reports
on its Web site.
The first report will be submitted
within sixty days after the MQP
becomes operative.
The Exchange will issue to its
members an information bulletin about
the MQP prior to operation of the
Program.
Surveillance
The Exchange believes that its
surveillance procedures are adequate to
properly monitor the trading of targeted
securities (including ETFs) on the
Exchange during all trading sessions,
and to detect and deter violations of
Exchange rules and applicable federal
securities laws. Trading of the targeted
MQP Securities through the Exchange
will be subject to FINRA’s surveillance
procedures for derivative products
including ETFs.79 The Exchange may
obtain information via the Intermarket
Surveillance Group (‘‘ISG’’) from other
exchanges that are members or affiliates
of the ISG; 80 and from listed MQP
Companies and public and non-public
data sources such as, for example,
Bloomberg.
77 Proposed
Rule 5950(c)(3). See also supra note
57.
78 17
CFR 242.605.
surveils trading on the Exchange
pursuant to a Regulatory Services Agreement
(‘‘RSA’’). The Exchange is responsible for FINRA’s
performance under this RSA.
80 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
79 FINRA
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77149
2. Statutory Basis
NASDAQ believes that the proposed
rule change is consistent with the
provisions of Section 6 of the Act,81 in
general, and with Sections 6(b)(4) and
6(b)(5) of the Act,82 in particular, in that
it provides for the equitable allocation
of reasonable dues, fees and other
charges among members and issuers or
Companies and other persons using any
facility or system which NASDAQ
operates or controls, and it is designed
to promote just and equitable principles
of trade, to remove impediments to and
perfect the mechanism of a free and
open market, and, in general, to protect
investors and the public interest.
The goal of the MQP—to incentivize
members to make high-quality, liquid
markets—supports the primary goal of
the Act to promote the development of
a resilient and efficient national market
system. Congress instructed the
Commission to pursue this goal by
emphasizing multiple policies,
including the promotion of price
discovery, order interaction and
competition among orders and markets.
The MQP promotes all of these policies;
it will enhance quote competition,
improve NASDAQ liquidity, support the
quality of price discovery, promote
market transparency and increase
competition for listings and trade
executions while reducing spreads and
transaction costs. Maintaining and
increasing liquidity in exchange-listed
securities executed on a registered
exchange will help raise investors’
confidence in the fairness of the market
and their transactions. Improving
liquidity in this manner is particularly
important with respect to ETFs and lowvolume securities, as noted by the Joint
CFTC/SEC Advisory Commission on
Emerging Regulatory Issues.83
Each aspect of the MQP adheres to
and supports the Act. First, the Program
promotes the equitable allocation of fees
and dues among issuers. The MQP is
completely voluntary in that it will
provide an additional means by which
issuers may relate to the Exchange
without modifying the existing listing
options. Issuers can supplement the
standard listing fees (which have
already been determined to be
consistent with the Act) with those of
81 15
U.S.C. 78f.
U.S.C. 78f(b)(4) and (5).
83 See Recommendations Regarding Regulatory
Responses To The Market Events Of May 6, 2010,
February 18, 2011 (Recommendation that the SEC
evaluate whether incentives or regulations can be
developed to encourage persons who engage in
market making strategies to regularly provide buy
and sell quotations that are ‘‘reasonably related to
the market.’’). Available at http://www.sec.gov/
spotlight/sec-cftcjointcommittee/021811-report.pdf.
82 15
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the MQP (which are consistent with the
Act as well). While the MQP will result
in higher fees for issuers that choose to
participate, the issuers receive
significant benefits for participating,
including greater liquidity, and lower
transaction costs for their investors.
Additionally, issuers will have the
ability to withdraw from the Program
after an initial commitment in the event
they determine that participation is not
beneficial. In that case, the withdrawing
issuers will automatically revert to the
already-approved fee schedule
applicable to the market tier in which
their shares are listed.
The MQP also represents an equitable
allocation of fees and dues among
Market Makers. Again, the MQP is
completely voluntary with respect to
Market Maker participation in that it
will provide an additional means by
which members may qualify for a credit,
without eliminating any of the existing
means of qualifying for incentives on
the Exchange. Currently, NASDAQ and
other exchanges use multiple fee
arrangements to incentivize Market
Makers to maintain high quality markets
or to improve the quality of executions,
including various payment for order
flow arrangements, liquidity provider
credits, and NASDAQ’s Investor
Support Program (set forth in NASDAQ
Rule 7014). Market Makers that choose
to undertake increased burdens
pursuant to the MQP will be rewarded
with increased credits; those that do not
undertake such burdens will receive no
added benefit. As with issuers, Market
Makers that choose to participate in the
MQP will be permitted to withdraw
from it after an initial commitment if
they determine that the burdens
imposed by the MQP outweigh the
benefits provided.
Additionally, the MQP establishes an
equitable allocation of MQP Credits
among Market Makers that choose to
participate and fulfill the obligations
imposed by the rule. If one Market
Maker fulfills those obligations, the
MQP Credit will be distributed by
NASDAQ to that Market Maker out of
the General Fund; and if multiple
Market Makers satisfy the standard, the
MQP Credit will be distributed pro rata
among them. In other words, all of the
benefit of the MQP Credits will flow to
high-performing Market Makers,
provided that at least one Market Maker
fulfills the obligations under the
proposed rule.
The MQP is designed to avoid unfair
discrimination among Market Makers
and issuers. The proposed rule contains
objective, measurable (universal)
standards that NASDAQ will apply with
care. These standards will be applied
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equally to ensure that similarly situated
parties are treated similarly. This is
equally true for inclusion of issuers and
Market Makers, withdrawal of issuers
and Market Makers, and termination of
eligibility for the MQP. The standards
are carefully constructed to protect the
rights of all parties wishing to
participate in the Program by providing
notice of requirements and a description
of the selection process. NASDAQ will
apply these standards with the same
care and experience with which it
applies the many similar rules and
standards in NASDAQ’s rule manuals.
In contrast to the extensive benefits of
the MQP, the participation of an MQP
Company in the Program is substantially
limited by design. In this regard, an
MQP Company is limited to making
only the following determinations
regarding the Program: whether to
participate in the Program; what MQP
Security should be in the Program;
when the MQP Security should exit the
Program; and the level of Supplemental
Fees, if any, that should be applied. The
MQP Company can never choose an
MQP Market Maker, nor influence how,
when, or the specific amount that an
MQP Market Maker receives as credit
for making a market in an MQP
Security; these functions are performed
solely by the Exchange according to
standards set forth in the Program.84
NASDAQ notes that it operates in a
highly competitive market in which
market participants can readily favor
competing venues if they deem fee
levels at a particular venue to be
excessive, or rebate opportunities
available at other venues to be more
favorable. In such an environment,
NASDAQ must continually adjust its
fees and program offerings to remain
competitive with other exchanges and
with alternative trading systems that
have been exempted from compliance
with the statutory standards applicable
to exchanges. NASDAQ believes that all
aspects of the proposed rule change
reflect this competitive environment
because the MQP is designed to increase
the credits provided to members that
enhance NASDAQ’s market quality.
Finally, NASDAQ notes that the
proposed paid for market making
system has been used successfully for
years on NASDAQ OMX Nordic’s First
North market. The First North paid for
market making system has been quite
beneficial to market participants
84 Indeed, the Exchange will not pay an MQP
Market Maker pursuant to the Program for making
a market in an MQP Security; rather, the Exchange
will pay an incentive out of its General Fund if—
and only if—an MQP Market Maker achieves very
specific, rules-based market quality objectives when
otherwise making a market.
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including investors and listing
companies (issuers) that have
experienced market quality and
liquidity with narrowed spreads. The
Exchange believes that the proposed
MQP will similarly enjoy positive
results to the benefit of investors in
MQP Securities and Companies related
to them and the financial markets as a
whole.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
NASDAQ does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
To the contrary, NASDAQ believes the
MQP program is pro-competitive in that
it will increase competition in both the
listings market and in the transaction
services market. The MQP will promote
competition in the listings market by
advancing NASDAQ’s reputation as an
exchange that works tirelessly to
develop a better market for all issuers,
and for partnering with issuers to
improve the quality of trading on
NASDAQ. In fact, the MQP is itself a
response to the competition provided by
other markets that are developing
similar programs, including NYSE Arca
and BATS. NASDAQ fully expects that
other listing venues will respond to the
MQP by further enhancing their listings
market offerings.
The MQP promotes competition in
the transaction services market by
creating incentives for market makers to
make better quality markets. As market
makers strive to attain the quality
standards established by the MQP, the
quality of NASDAQ’s quotes will
improve. This, in turn, will attract more
liquidity to NASDAQ and further
improve the quality of trading of MQP
stocks. Again, if the MQP is successful
in its goals, NASDAQ fully expects that
competing markets will respond by
creating incentives of their own to
improve the quality of their markets and
to attract liquidity to their markets.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received from
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
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longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act. The
Commission previously received
comments on SR–NASDAQ–2012–043,
which proposed rule change was
withdrawn by the Exchange,85 and all
such comments are available on the
Commission’s Internet Web site (http://
www.sec.gov/rules/sro.shtml.)
Comments may be submitted by any
of the following methods:
mstockstill on DSK4VPTVN1PROD with
Electronic Comments
• Use the Commission’s Internet
comment form (http://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2012–137 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2012–137. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Section, 100 F Street NE.,
Washington, DC 20549–1090, on official
business days between 10:00 a.m. and
3:00 p.m. Copies of the filing also will
85 See
supra note 3.
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be available for inspection and copying
at the principal office of the Exchange.
All comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NASDAQ–2012–137 and
should be submitted on or before
January 22, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.86
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–31410 Filed 12–28–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68511; SR–NYSEArca2012–66]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Designation of
Longer Period for Commission Action
on Proceedings To Determine Whether
To Approve or Disapprove a Proposed
Rule Change To List and Trade Shares
of the iShares Copper Trust Pursuant
to NYSE Arca Equities Rule 8.201
December 21, 2012.
On June 19, 2012, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares of the
iShares Copper Trust (‘‘Trust’’) pursuant
to NYSE Arca Equities Rule 8.201.
BlackRock Asset Management
International Inc. is the sponsor of the
Trust (‘‘Sponsor’’). The proposed rule
change was published for comment in
the Federal Register on June 27, 2012.3
The Commission initially received
one comment letter, which opposed the
proposed rule change.4 On August 8,
86 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 67237
(June 22, 2012), 77 FR 38351 (‘‘Notice’’).
4 See letter from Robert B. Bernstein, Vandenberg
& Feliu, LLP (‘‘V&F’’), to Elizabeth M. Murphy,
Secretary, Commission, dated July 18, 2012 (‘‘V&F
July 18 Letter’’). Comment letters are available at
http://www.sec.gov/comments/sr-nysearca-2012–
66/nysearca201266.shtml. The commenter
identified itself as a U.S. law firm that represents
RK Capital LLC, an international copper merchant,
and four end-users of copper: Southwire Company,
Encore Wire Corporation, Luvata, and AmRod Corp
(collectively, the ‘‘Copper Fabricators’’).
1 15
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77151
2012, the Commission instituted
proceedings to determine whether to
approve or disapprove the proposed
rule change.5 Subsequently, the
Commission received additional
comments on the proposed rule
change.6 On December 12, 2012, the
Exchange filed Amendment No. 1 to the
proposed rule change.
Section 19(b)(2) of the Act 7 provides
that, after initiating disapproval
proceedings, the Commission shall issue
an order approving or disapproving the
proposed rule change not later than 180
days after the date of publication of
notice of the filing of the proposed rule
change. The Commission may extend
the period for issuing an order
approving or disapproving the proposed
rule change, however, by not more than
60 days if the Commission determines
that a longer period is appropriate and
publishes the reasons for such
determination. The proposed rule
change was published for notice and
comment in the Federal Register on
June 27, 2012. The 180th day after
5 See Securities Exchange Act Release No. 67616,
77 FR 48181 (August 13, 2012) (‘‘Order Instituting
Proceedings’’).
6 See letters from Robert B. Bernstein, V&F, to
Elizabeth M. Murphy, Secretary, Commission, dated
September 12, 2012; Ira P. Shapiro, Managing
Director, and Deepa A. Damre, Director, Legal and
Compliance, BlackRock, Inc., to Elizabeth M.
Murphy, Secretary, Commission, dated September
12, 2012; Janet McGinness, General Counsel, NYSE
Markets, NYSE Euronext, to Elizabeth M. Murphy,
Secretary, Commission, dated September 14, 2012;
Robert B. Bernstein, V&F, to Elizabeth M. Murphy,
Secretary, Commission, dated September 27, 2012
(‘‘V&F September 27 Letter’’); Robert B. Bernstein,
V&F, to Elizabeth M. Murphy, Secretary,
Commission, dated November 16, 2012; and Robert
B. Bernstein, Partner, Eaton & Van Winkle LLP, to
Elizabeth M. Murphy, Secretary, Commission, dated
December 7, 2012. By letter dated November 29,
2012, Mr. Bernstein informed the Commission that
he had left V&F and would continue to represent
the Copper Fabricators and RK Capital LLC in this
proceeding.
In the V&F September 27 Letter, the commenter
incorporated by reference all of its prior comments
in opposition to NYSE Arca’s proposal to list and
trade shares of the JPM XF Physical Copper Trust.
See V&F September 27 Letter, supra, at 6.
Responding to that proposed rule change, the
commenter submitted the following: letters from
V&F, received May 9, 2012; Robert B. Bernstein,
V&F, to Elizabeth M. Murphy, Secretary,
Commission, dated July 13, 2012; Robert B.
Bernstein, V&F, to Elizabeth M. Murphy, Secretary,
Commission, dated August 24, 2012; and Robert B.
Bernstein, V&F, to Elizabeth M. Murphy, Secretary,
Commission, dated September 10, 2012.
Additionally, the commenter stated that it agreed
with the arguments against that proposal set forth
in a letter from U.S. Senator Carl Levin, to Elizabeth
M. Murphy, Secretary, Commission, dated July 16,
2012 (‘‘Levin Letter’’), and attached the Levin Letter
to the V&F July 18 Letter. See V&F July 18 Letter,
supra, at 5. These letters opposing the proposal to
list and trade shares of the JPM XF Physical Copper
Trust are available at http://www.sec.gov/
comments/sr-nysearca-2012–28/
nysearca201228.shtml.
7 15 U.S.C. 78s(b)(2).
E:\FR\FM\31DEN1.SGM
31DEN1

Agencies

[Federal Register Volume 77, Number 250 (Monday, December 31, 2012)]
[Notices]
[Pages 77141-77151]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-31410]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68515; File No. SR-NASDAQ-2012-137]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto
to Establish the Market Quality Program
December 21, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 7, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III, below, which Items have been prepared by the
Exchange. On December 20, 2012, the Exchange submitted Amendment No. 1
to the proposed rule change, which replaces and supersedes the proposed
rule change in its entirety. The Commission is publishing this notice
to solicit comments on the proposed rule change, as modified by
Amendment No. 1 thereto, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASDAQ is filing with the Commission a proposal to add new Rule
5950 (Market Quality Program) to enable market makers that voluntarily
commit to and do in fact enhance the market quality (quoted spread and
liquidity) of certain securities listed on the Exchange to qualify for
a fee credit pursuant to the Exchange's Market Quality Program and to
exempt the Market Quality Program from Rule 2460 (Payment for Market
Making). NASDAQ believes this voluntary program will benefit investors,
issuers or companies, and market participants by significantly
enhancing the quality of the market and trading in such listed
securities.
The Market Quality Program set forth in Rule 5950 will be effective
for a one year pilot period beginning from the date of implementation
of the program. During the pilot, NASDAQ will periodically provide
information to the Commission about market quality in respect of the
Market Quality Program.
The text of the proposed rule change is available from NASDAQ's Web
site at http://nasdaq.cchwallstreet.com/Filings/, at NASDAQ's principal
office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASDAQ included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. NASDAQ has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
This Amendment No.1 to SR-NASDAQ-2012-137 replaces and supercedes
[sic] SR-NASDAQ-2012-137 in its entirety.\3\
---------------------------------------------------------------------------
\3\ SR-NASDAQ-2012-137 replaced SR-NASDAQ-2012-043, which was
withdrawn by the Exchange. See Securities Exchange Act Release Nos.
66765 (April 6, 2012), 77 FR 22042 (April 12, 2012)(SR-NASDAQ-2012-
043)(notice of filing); and 68378 (December 6, 2012), 77 FR 74042
(December 12, 2012)(notice of withdrawal). Attached hereto is
Exhibit 4 that reflects the changes made to Exhibit 5. The
Commission notes that Exhibit 4 is attached to the filing, not to
this Notice.
---------------------------------------------------------------------------
The purpose of the filing is to propose new Rule 5950 to enable
Market Makers \4\ that enhance the market quality of certain securities
listed on the Exchange (known as ``targeted securities'') and thereby
qualify for a fee credit pursuant to the Market Quality Program
(``MQP'' or ``Program'') and to exempt the Program from Rule 2460.
---------------------------------------------------------------------------
\4\ The term ``Market Maker'' is defined in Rule 5005(a)(24) as
a dealer that, with respect to a security, holds itself out (by
entering quotations in the NASDAQ Market Center) as being willing to
buy and sell such security for its own account on a regular and
continuous basis and that is registered as such.
---------------------------------------------------------------------------
Proposed Rule 5950 will be effective for a one year pilot period.
The pilot period will commence when the Market Quality Program is
implemented by the Exchange and an MQP Company,\5\ on behalf of an MQP
security, and one or more related Market Makers are accepted into the
MQP in respect of a security listed pursuant to the Program (``MQP
Security'').\6\ The pilot program will, unless extended, end one year
after implementation.\7\ During the pilot, the
[[Page 77142]]
Exchange will periodically provide information to the Commission about
market quality in respect of the MQP.\8\
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\5\ The term ``MQP Company'' is defined in proposed Rule
5950(e)(5) as the trust or company housing the Exchange Traded Fund
or, if the Exchange Traded Fund is not a series of a trust or
company, then the Exchange Traded Fund itself. MQP Fees for MQP
Securities will be paid by the Sponsors associated with the MQP
Companies. The term Sponsor means the registered investment adviser
that provides investment management services to an MQP Company or
any of such adviser's parents or subsidiaries.
\6\ The term ``MQP Security'' is defined in proposed Rule
5950(e)(1) as an Exchange Traded Fund (``ETF'') security issued by
an MQP Company that meets all of the requirements to be listed on
NASDAQ pursuant to Rule 5705. For the definition of ETF, see
proposed Rule 5950(e)(2).
\7\ The Exchange believes that, based on discussions with the
Financial Industry Regulatory Authority (``FINRA''), FINRA intends
to file an immediately effective rule change that would exempt from
FINRA Rule 5250 exchange programs that are approved by the
Commission. The Exchange notes that FINRA Rule 5250 does not
preclude the Exchange from any action, but precludes FINRA members
(not all Exchange members are FINRA members) from directly or
indirectly accepting payment or consideration from an issuer of a
security for acting as a market maker. See Securities Exchange Act
Release Nos. 60534 (August 19, 2009), 74 FR 44410 (August 28,
2009)(SR-FINRA-2009-036)(order approving proposal to adopt NASD Rule
2460 without substantive change into the Consolidated FINRA Rulebook
as Rule 5250); and 38812 (July 3, 1997), 62 FR 37105 (July 10,
1997)(SR-NASD-97-29)(order approving adoption of NASD Rule 2460;
FINRA Rule 5250 and NASDAQ Rule 2460 are based on NASD Rule
2460)(the ``1997 order''). Being mindful of the concern in the 1997
order about investor confidence and market integrity, the Exchange
designed the MQP Program to be highly transparent, with: clear
public notification requirements; clear entry, continuation, and
termination requirements; clear market maker accountability
standards; and, perhaps most importantly, clear market quality
(liquidity) enhancement standards that benefit investors and market
participants.
The Exchange has a provision in its Rule 2460 that is, in
respect of Exchange members, largely similar to FINRA Rule 5250. See
Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR
3550 (January 23, 2006)(File No. 10-131) (order approving
registration of The NASDAQ Stock Market LLC as a national securities
exchange and adopting Rule 2460). As discussed in the body of the
proposal, the Exchange proposes to modify Rule 2460 so that it is
not applicable to the MQP.
\8\ As the Exchange notes in the filing, the goal is to expand
the MQP, if successful, to small cap stocks that may benefit from
liquidity enhancement and in turn help to promote economic
expansion. To expand the MQP in this fashion, the Exchange will need
to file a new proposed rule change with the Commission.
---------------------------------------------------------------------------
Background
The proposed Market Quality Program is a voluntary program designed
to promote market quality in MQP Securities.\9\ An MQP Company may list
an eligible MQP Security on NASDAQ and in addition to the standard
(non-MQP) NASDAQ listing fee as set forth in the Rule 5000 Series
(consisting of Rules 5000-5999),\10\ a Sponsor may pay a fee (``MQP
Fee'') in order for the MQP Company, on behalf of an MQP Security, to
participate in the Program. The MQP Fee will be credited to NASDAQ's
General Fund. NASDAQ will incentivize one or more Market Makers in the
MQP Security (``MQP Market Maker'') to enhance the market quality of
the MQP Security. Subject to the conditions set forth in this rule, out
of its General Fund NASDAQ will credit (``MQP Credit'') one or more MQP
Market Makers that make a quality market in the MQP Security pursuant
to the Program.\11\ The recipients and the size of their credits will
be determined solely by NASDAQ pursuant to objective criteria; issuers
will have no role in selecting the recipients or in determining the
specific amount, if any, of their credits.
---------------------------------------------------------------------------
\9\ The Exchange notes that MQP Securities do not encompass
derivatives on such securities.
\10\ The Rule 5000 Series contains rules related to the
qualification, listing and delisting of Companies on NASDAQ. The
Rule 5100 Series discusses NASDAQ's general regulatory authority.
The Rule 5200 Series sets forth the procedures and prerequisites for
gaining a listing on NASDAQ, as well as the disclosure obligations
of listed Companies. The Rule 5300, 5400, and 5500 Series contain
the specific quantitative listing requirements for listing on the
Global Select, Global Market, and Capital Market, respectively. The
corporate governance requirements applicable to all Companies are
contained in the Rule 5600 Series. Special listing requirements for
securities other than common or preferred stock and warrants are
contained in the Rule 5700 Series. The consequences of a failure to
meet NASDAQ's listing standards are contained in the Rule 5800
Series. Finally, listing fees are described in the Rule 5900 Series.
\11\ The enhanced market quality (e.g. liquidity) would, as
discussed below, emanate from market quality standards for MQP
Market Makers that include, for example, posting a market in an MQP
Security that is no wider on the offer side and no wider on the bid
side than 2% away from NBBO. Proposed Rule 5950(c)(1)(B).
Other markets have considered various ways to increase
liquidity in low volume securities. NYSE Euronext, for example, has
advocated that a market-wide pilot program with wider spread
increments for less liquid securities could be a worthwhile
experiment. NYSE Euronext has also recognized that the creation of a
program in which small companies could enter into agreements
directly with broker-dealers or through exchanges to provide direct
payments to a broker-dealer who agrees to make a market in the
issuer's security is an idea that may warrant further review by
FINRA and the Commission. See Testimony of Joseph Mecane, Executive
Vice President, NYSE Euronext, Before the House Committee on
Government Reform and Oversight, November 15, 2011. See also
Securities Exchange Act Release No. 66966 (May 11, 2012), 77 FR
29419 (May 17, 2012)(SR-NYSEArca-2012-37)(notice of filing regarding
Lead Market Maker incentive program).
---------------------------------------------------------------------------
The Need for the MQP
The Exchange believes that the MQP will be beneficial to the
financial markets, to market participants including traders and
investors, and to the economy in general. First, the MQP will encourage
narrow spreads and liquid markets in situations that generally have not
been, or may not be, conducive to naturally having such markets. The
securities that comprise these markets may include less actively traded
or less well known ETF products that are made up of securities of less
well known or start-up companies as components.\12\ Second, in
rewarding Market Makers that are willing to ``go the extra mile'' to
develop liquid markets for MQP Securities,\13\ the MQP would clearly
benefit traders and investors by encouraging more quote competition,
narrower spreads and greater liquidity. Third, the MQP will lower
transaction costs and enhance liquidity in both ETFs and their
components, making those securities more attractive to a broader range
of investors. In so doing, the MQP will help companies access capital
to invest and grow. And fourth, the MQP may attract smaller, less
developed companies and investment opportunities to a regulated and
transparent market and thereby serve the dual function of providing
access to on-Exchange listing while expanding investment and trading
opportunities to market participants and investors.
---------------------------------------------------------------------------
\12\ These small companies and their securities (whether
components of listed products like ETFs or direct listings) have
been widely recognized as essential to job growth and creation and,
by extension, to the health of the economy. Being included in a
successful ETF can provide the stocks of these companies with
enhanced liquidity and exposure, enabling them to attract investors
and access capital markets to fund investment and growth.
\13\ By imposing quality quoting requirements to enhance the
quality of the market for MQP Securities, the MQP will directly
impact one of the ways that Market Makers manage risk in lower tier
or less liquid securities (e.g. the width of bid and offer pricing).
---------------------------------------------------------------------------
There is support for paid for market making (also known as
``PFMM'') at the highest governmental levels. Congressman Patrick
McHenry, the Chairman of the House Committee on Governmental Reform and
Oversight, for example, recently noted that agreements between issuers
and market makers to pay for market making activity ``* * *would allow
small companies to produce an orderly, liquid market for their stocks.
Research has shown that these agreements, already permitted overseas,
have led to a positive influence on liquidity for small public
companies.'' \14\
---------------------------------------------------------------------------
\14\ See Payments to Market Makers May Improve Trading in
Smaller Stocks, by Nina Mehta, Bloomberg, November 15, 2011.
The Exchange believes that by establishing specific market
quality requirements in the MQP to expand quote competition and
liquidity in targeted securities such as ETFs, the Program will be
conducive to capital formation--not only in the targeted securities
or ETFs (e.g. higher trading volume and/or creation of additional
share units) but also in the individual components that make up the
targeted securities (e.g. higher share trading volume). Securities
that trade in active, liquid markets are less likely to suffer from
mispricing (that is, a discount in pricing because of a lack of
liquidity) that can diminish a company's ability to raise capital
for further investment and growth.
---------------------------------------------------------------------------
In a similar vein, Robert Greifeld, Chief Executive Officer of The
NASDAQ OMX Group, Inc. (``NASDAQ OMX''), has noted that unlike the
United States, ``[t]he U.K., Canada and Sweden all have exchange
markets that serve as ``incubators'' for smaller companies.\15\
[[Page 77143]]
The Exchange believes that the MQP proposal will, by encouraging liquid
markets, enable the Exchange to similarly serve as an ``incubator,''
and to continue being an innovator in expanding markets to benefit
market participants, traders, and investors.\16\ The MQP would reward
market makers for committing capital to securities and meeting rigorous
market quality benchmarks established by the Program.\17\ This approach
has worked very successfully in overseas markets, including the NASDAQ
OMX Nordic First North market (known as ``First North'').
---------------------------------------------------------------------------
\15\ See Robert Greifeld, CEO, NASDAQ OMX, Sarbox and
Immigration Reform for Jobs, Wall Street Journal, October 4, 2011.
For a discussion of capital formation issues in the U.S., see
letters between Mary Shapiro, Chairman of the Commission and
Congressman Darrel E. Issa, Chairman of the House Committee on
Oversight and Governmental Reform, dated March 22, 2011, April 6,
2011, and April 29, 2011.
\16\ See Securities Exchange Act Release No. 63270 (November 8,
2010), 75 FR 69489 (November 12, 2010)(NASDAQ-2010-141)(notice of
filing and immediate effectiveness establishing the Investor Support
Program to attract retail order flow to the Exchange). See also
Securities Exchange Act Release No. 64437 (May 6, 2011), 76 FR 27710
(May 12, 2011)(NASDAQ-2010-059)(approval order creating a listing
market, The BX Venture Market, that will have strict qualitative
listing requirements and quantitative standards that would attract
smaller, growth companies).
\17\ See Testimony of Edward S. Knight, General Counsel and
Executive Vice President, NASDAQ OMX Group, Before the Senate
Committee on Banking, Housing, and Urban Affairs, December 1, 2011.
---------------------------------------------------------------------------
The practice of paid for market making to increase the liquidity of
less liquid securities was examined by Johannes A. Skjeltorp and Bernt
Arne Odegaard in a working paper from June 2011.\18\ Skjeltorp and
Odegaard examined paid for market making on the Oslo Stock Exchange,
which uses a market making model that is similar to that of NASDAQ's
First North market,\19\ and noted that they ``* * * find a significant
reduction in liquidity risk and cost of capital for firms that hire a
market maker. Firms that prior to hiring a market maker * * * [have] a
high loading on a liquidity risk factor, experience a significant
reduction in liquidity risk to a level similar to that of the larger
and more liquid stocks on the exchange.''
---------------------------------------------------------------------------
\18\ See Why do Firms Pay for Market Making in Their Own Stock?
by Johannes A. Skjeltorp, Norges Bank, and Bernt Arne Odegaard,
University of Stavanger and Norges Bank, June 2011. See also Why
Designate Market Makers? Affirmative Obligations and Market Quality
by Hendrik Bessembinder, Jia Hao, and Michael Lemmon, June 2011.
This study suggests that future flash crashes can be avoided and
social welfare enhanced by designating market makers and engaging
paid for market making; and observing the positive attributes of
direct payments from listed firms to designated market makers on the
Stockholm Stock Exchange and Euronext Paris.
\19\ The Exchange believes that the Skjeltorp and Odegaard
article is therefore directly applicable to the First North paid for
market making experience.
---------------------------------------------------------------------------
About six years prior to the Skjeltorp and Odegaard article, Amber
Anand, Carsten Tanggaard, and Daniel G. Weaver studied liquidity
provision through paid for market making on the Stockholm Stock
Exchange (``SSE''), currently named NASDAQ OMX Stockholm AB.\20\ The
researchers examined the success of fifty previously illiquid firms
that were listed on the SSE and enjoyed, along with investors, the
benefits of paid for market making. The researchers examined the impact
of the paid market maker program and found that firms experienced ``* *
*a decreased cost of capital and significant improvements in market
quality and price discovery.'' \21\ The market makers were known as
liquidity providers and the firms could set maximum spread widths for
their stocks, as is currently done. Anand, Tanggaard, and Weaver found
that following the beginning of paid for market making services,
spreads narrowed by a statistically significant amount and depth
increased at the inside and in the aggregate for four price levels away
from the inside. The researchers found that accompanying the increase
in depth was a significant increase in average trade size, suggesting
that traders did not find it necessary to break up their orders to
accommodate low market depth. They also found an increase in trading
activity, suggesting that liquidity providers were actively trading
with public customers.
---------------------------------------------------------------------------
\20\ See Paying for Market Quality, Working Paper F-2006-06 by
Amber Anand, Carsten Tanggaard, and Daniel G. Weaver, November 2005,
Aarhus School of Business.
\21\ At the time of the study, SSE was owned by OMX AB. SSE
merged into NASDAQ OMX in 2008 and retained its identity within the
new corporate structure. The SSE paid for market making system
matured into the current First North market.
---------------------------------------------------------------------------
More recently, Eric Noll, Executive Vice President, NASDAQ OMX,
described the positive impact of paid for market making in the First
North market, a European venue for smaller companies that has a program
enabling companies to compensate market makers.\22\ Mr. Noll stated
that NASDAQ OMX has had ``great success'' in increasing liquidity in
stocks on First North, and that in just five years, the First North
market has grown to 141 listings with a total capitalization of 2.8
billion Euros. Twenty-two 22 First North companies have graduated to
the main market since 2006.\23\
---------------------------------------------------------------------------
\22\ See Payments to Market Makers May Improve Trading in
Smaller Stocks, by Nina Mehta, Bloomberg, November 15, 2011.
\23\ See Testimony of Eric Noll, Executive Vice President,
NASDAQ OMX Group, Before the House Committee on Government Reform
and Oversight, November 15, 2011. Mr. Noll noted also that one of
the unintended consequences of market fragmentation in the current
U.S. securities markets has been a lack of liquidity and price
discovery in listed securities outside of the top 100 traded names,
and a disturbing absence of market attention paid to small growth
companies by market participants. The Exchange believes that the MQP
proposal offers a practical and positive solution.
---------------------------------------------------------------------------
Paid for Market Making on the First North Market
The Exchange believes that commensurate with the previously-
discussed studies regarding paid for market making,\24\ it is
instructive to examine the paid for market making experience on the
First North market.
---------------------------------------------------------------------------
\24\ See supra notes 18, 19, and 20.
---------------------------------------------------------------------------
By way of background, the First North market is an alternative
listing market to the NASDAQ OMX Nordic Main Market (``Main
Market'').\25\ Both First North and Main Market are subject to and
regulated by European Union (``EU'') directives\26\ and exchange rules,
and are supervised and regulated by one or more Financial Services
Authorities (``FSAs'').\27\ While the Main Market is intended for
listing companies that are well established, First North is intended
for listing small, young or growth companies (not unlike the
beneficiaries of the MQP) while providing an infrastructure and trading
and settlement system that is similar to that of the Main Market. First
North offers new or small public companies the benefits of listing on a
public market and the potential for good markets through a paid for
market making system, and is often the first step towards listing on
the Main Market.\28\
---------------------------------------------------------------------------
\25\ NASDAQ OMX Nordic, which has securities exchanges and
clearing operations in the Nordic countries of Sweden, Denmark,
Iceland, and Finland and Baltic countries of Latvia and Estonia,
operates First North and the Main Market. For additional
information, see http://www.nasdaqomxnordic.com/about_us?languageId=1.
\26\ For example, the Markets in Financial Instruments Directive
(``MiFID''). It should be noted that certain parts of the EU
legislation, for example the Transparency Directive, only apply to
companies admitted to trading on the Main Market.
\27\ A Financial Services Authority or ``FSA'' is the regulator
of financial services and securities exchanges in an EU country
(including the Nordics) and as such is similar to the Commission in
respect of involvement in market regulation and oversight.
\28\ The First North and Main Market have increasingly higher
listing standards, similarly to the tiered NASDAQ listings markets.
See Rule 5300, 5400, and 5500 Series regarding the Global Select,
Global Market, and Capital Market, respectively. In a similarly
tiered fashion, between First North and Main Market is an
intermediary market known as First North Premiere (a segment of
First North) that is designed to help companies seeking higher
investor visibility and/or preparation for Main Market listing.
---------------------------------------------------------------------------
The First North paid for market making system is based on a
standard exchange-supplied contract between a listing firm and a
designated market maker (``DMM'') that sets forth market obligations
for the market maker. The Exchange sets forth obligations for the
[[Page 77144]]
MQP Market Makers (as well as MQP Companies) in proposed Rule 5950 in
the belief that this provides the greatest amount of transparency, and
accountability, for all that wish to participate in the MQP.
The paid for market making model on NASDAQ's First North has
operated since 2002 and has been demonstrably successful to the benefit
of issuers and investors, without material regulatory issues. One of
the definitive market quality attributes associated with expansion of
liquidity through paid for market making is the significant narrowing
of bid/ask spreads. This phenomenon is directly and immediately
beneficial for all market participants including investors and listing
companies (which may also benefit from accompanying volume increase).
As depicted in the chart below, in 2010 and 2011 the Relative Time
Weighted Average Spread (``RTWAS'') \29\ at First North was
significantly better for securities with PFMM than for those without
the benefit of PFMM.
---------------------------------------------------------------------------
\29\ RTWAS is the bid/ask spread relative to the stock price
calculated at every NBBO change, then averaged with weights for how
long each NBBO condition lasted.
---------------------------------------------------------------------------
The substantial positive advantage that market participants receive
from PFMM is clearly demonstrated in the chart below, showing that non-
PFMM security spreads were: (a) Often more than four times wider than
PFMM security spreads; and (b) a majority of the time more than three
times wider than PFMM spreads. Moreover, the spreads for stocks with
PFMM were more stable through time.
[GRAPHIC] [TIFF OMITTED] TN31DE12.002
A comparison of Relative Time Weighted Average Spread on First
North shows the significant, consistent impact of PFMM in narrowing
spreads.\30\ This directly benefits investors in PFMM securities by
lowering their transaction costs.\31\
---------------------------------------------------------------------------
\30\ The Exchange believes that the volatility reflected on the
RTWAS chart after August 2011 is due in large part to economic
events in the EU.
\31\ The Exchange believes that just as First North's positive
PFMM experience is successful in its own right, so it is equally
positive within the wider European liquidity enhancement (paid for
market making) experience. See, for example, How Do Designated
Market Makers Create Value for Small-Caps? by Albert J. Menkveld and
Ting Wang, August 1, 2011. This analysis of the 2001 Euronext system
roll-out to the Amsterdam market, where small-caps had the
opportunity to hire a DMM who guaranteed a minimum liquidity supply
in their stock, found an improvement in liquidity level and a
reduction in liquidity risk. See also Designated Sponsors and Bid-
Ask Spreads on Xetra by J[ouml]rdis Hengelbrock, October 31, 2008.
This analysis of Deutsche B[ouml]rse Group's Xetra program that
began in the 1990s, where issuers of less liquid stocks could
contract with a Designated Sponsor to provide liquidity in a stock
for a fee, found that investor costs including spreads were lower
for those stocks that had at least one such dedicated Designated
Sponsor.
---------------------------------------------------------------------------
In terms of regulation, the First North PFMM experience has not
raised concerns. Based on Exchange discussions with the Office of
General Counsel at NASDAQ OMX Nordic in respect of the First North
market, the Exchange is not aware of regulatory oversight issues (e.g.
Swedish FSA or Danish FSA) in respect of paid for market making on
First North.\32\
---------------------------------------------------------------------------
\32\ Moreover, the Exchange notes that while spreads widened for
stocks on all markets around the world during the height of the
financial crisis in September and October 2008, First North stocks
with PFMM experienced less spread widening than comparable stocks
without PFMM.
---------------------------------------------------------------------------
The Exchange believes that the MQP will, like paid for market
making on First North, achieve positive results.\33\
---------------------------------------------------------------------------
\33\ The Exchange believes that even though First North market
lists equities while the proposed MQP market would emphasize listing
ETF products, this does not detract from, and indeed enhances, the
comparability of the First North PFMM experience to MQP. See infra
note 36 (discussing the potential benefit of the unique trust
structure of ETFs).
---------------------------------------------------------------------------
The Proposal--Background
The Exchange believes that this proposal would help raise investor
and issuer confidence in the fairness of their transactions and the
markets in general by enhancing market maker quote competition in
securities on the Exchange, narrowing spreads, increasing shares
available at the inside, reducing transaction costs, supporting
[[Page 77145]]
the quality of price discovery, and promoting market transparency.\34\
---------------------------------------------------------------------------
\34\ The Commission has recognized the strong policy preference
under the Act in favor of price transparency and displayed markets.
See Securities Exchange Act Release No. 61358 (January 14, 2010), 75
FR 3594 (January 21, 2010) (Concept Release on Equity Market
Structure).
To that end, the Exchange has recently put into place
initiatives designed to expand the liquidity of certain targeted
securities on transparent and displayed markets on the Exchange.
See, for example, Securities Exchange Act Release No. 63270
(November 8, 2010), 75 FR 69489 (November 12, 2010)(SR-NASDAQ-2010-
141)(notice of filing and immediate effectiveness of proposal to
establish Investor Support Program in respect of retail or natural
order flow).
---------------------------------------------------------------------------
As noted, the proposal would enhance the market quality of targeted
securities, particularly ETFs. The Exchange believes that ETFs offer
great value to retail and institutional investment communities, as
reflected in their popularity as investment vehicles both in the U.S.
and abroad.\35\ ETFs offer transparency, liquidity, diversification,
cost efficiency and investment flexibility to gain broad market
exposure or to express a directional view as a core or satellite
component to one's investment portfolio; and do so while offering
investment exposure to all asset classes--many of which would otherwise
be inaccessible.\36\ Moreover, ETFs, particularly those that are equity
based, also benefit listed companies. By being included in a single,
diversified security, companies gain access to a greater audience of
investors who may not have bought the individual stock.\37\ This means
that the markets are deeper and more liquid, benefiting not only
investors but the economy as a whole.\38\ This proposal will allow ETFs
that may not otherwise see much trading or volume\39\ to be listed and
traded on the Exchange in more liquid markets.\40\ In that this
proposal is designed to provide market quality support to smaller, less
frequently traded segments of securities (ETFs), subsection (d) of
proposed Rule 5950, which catalogues the reasons for termination of the
MQP and is discussed at length below, indicates that an MQP Security
will no longer be eligible to remain in the MQP if the security
sustains an average daily trading volume (consolidated trades in all
U.S. markets) (``ATV'') of one million shares or more for three
consecutive months. While the Exchange originally proposed a two
million shares threshold in the withdrawn MQP proposal at SR-NASDAQ-
2012-043, it is scaling back the threshold to one million shares to
better provide NASDAQ and the Commission with an opportunity to observe
the impact, if any, on MQP Securities that exceed the threshold and
``graduate'' from the Program. The Exchange has compiled statistics
indicating that ``graduation'' from the Program may occur more
frequently at a one million threshold than a two million threshold:
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\35\ The Exchange notes that foreign (non-U.S.) ETFs,
particularly those that are derivative-based, may have certain
negative characteristics that are not present in U.S. ETFs. In some
cases, under the Undertakings for Collective Investment in
Transferable Securities (UCITS, Europe's equivalent of the
Investment Company Act of 1940 (``1940 Act'')) structure, individual
firms are permitted to fulfill multiple roles within the construct
of the product's trading and or creation/redemption process (e.g.
the Sponsor/Issuer of a European ETF could be the same entity as the
market maker, distributor, intraday Net Asset Value (``NAV'')
calculation agent, custodian bank and/or counterparty to any
underlying asset). Under the 1940 Act, this is not permitted.
\36\ It has been noted that since the prices of ETFs are
generally linked back to the underlying securities, there is less
opportunity for manipulation. See Payments to Market Makers May
Improve Trading in Smaller Stocks, by Nina Mehta, Bloomberg,
November 15, 2011. To that end, the Exchange notes that by
definition an ETF will have an insulating wall between Market Maker
and product, namely a trust structure--which is not present with
other products such as equity securities--that establishes the daily
NAV for an ETF. NAV reflects the per-share value of an ETF, which is
based upon the performance of a fund's underlying components and
methodology.
\37\ See Testimony of Eric Noll, Executive Vice President,
NASDAQ OMX, Before the Securities Subcommittee of the Senate Banking
Committee October 19, 2011 (``I can tell you from personal
experience that the companies that make up QQQ [(the NASDAQ-100
technology ETF)] consider it a real achievement, and certainly
NASDAQ is proud of the excellence QQQ represents.'').
In addition, the Exchange believes that purchasers of ETFs that
find success because of increased market quality (especially where
such ETFs are smaller or niche funds with fewer components) may
choose to invest directly in the fund components after a positive
ETF market quality and execution experience.
\38\ See Testimony of Eric Noll, Executive Vice President,
NASDAQ OMX, Before the House Committee on Government Reform and
Oversight, November 15, 2011.
\39\ There are a record 377 funds (273 ETFs and 104 ETNs) on the
August 2012 ``ETF Deathwatch'' list maintained by Ron Rowland,
president of Capital Cities Asset Management. All the funds on this
list have limped along for at least three months with less than $5
million in assets or fewer than $100,000 worth of shares changing
hands daily. The list now includes about 17% of the industry's
approximately 1,400 ETFs and exchange-traded notes, as measured by
number of funds. Mr. Rowland states: ``The largest risk is not,
however, that [the funds] may close in the future. No, the more
notable risk is that they suffer from extremely poor liquidity
today. Wide bid/ask spreads, little to no volume behind the quotes,
and sleeping market makers can potentially inflict much more damage
on unknowing investors than a fund closure.''
Perhaps the most astonishing statistic, which clearly shows the
critical need for a rules-based liquidity-enhancement program such
as the MQP, is that ETF Deathwatch list surged 131% in the past
year.
\40\ Subsection (a)(1)(C)(iv) of Proposed Rule 5950 indicates
that the Exchange will post on its Web site a general description of
the Program as implemented on a pilot basis and a fair and balanced
summation of the potentially positive aspects of the Program (e.g.
enhancement of liquidity and market quality in MQP Securities) as
well as the potentially negative aspects and risks of the Program
(e.g. possible lack of liquidity and negative price impact on MQP
Securities that withdraw or are terminated from the Program), and
indicates how interested parties can get additional information
about products in the Program.
[GRAPHIC] [TIFF OMITTED] TN31DE12.003
Moreover, while the MQP pilot is structured to initially apply only
to ETFs, the goal is to expand the MQP, if successful, to small cap
stocks and other similar products that may need liquidity enhancement.
The Exchange believes that while this would benefit small cap MQP
products and investors as well as overall market liquidity, perhaps
even more importantly it would serve to help economic expansion and the
economy as a whole.\41\
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\41\ This is clearly consistent with recent legislative action
designed to create job opportunities and promote economic expansion,
such as the Jumpstart Our Business Startups Act (JOBS Act).
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[[Page 77146]]
The Proposal--Specifics
Proposed Rule 2460
Preliminarily, the Exchange is proposing to modify its Rule 2460,
which prohibits direct or indirect payment by an issuer to a Market
Maker, to indicate that Rule 2460 is not applicable to the MQP.\42\
Specifically, the Exchange is proposing new IM-2460-1 (Market Quality
Program) \43\ to state that Rule 2460 is not applicable to a member
that is accepted into the Market Quality Program pursuant to Rule 5950
or to a person that is associated with such member for their conduct in
connection with that program. The Exchange believes that this proposed
limited clarification is proper in that it allows the MQP to go forward
on a pilot basis without denigrating the basic premise of Rule 2460,
which was designed to forestall problematic relationships between
exchange members (e.g. market makers) and issuers. The Exchange's
proposal sets forth an extensive rule-based process with clear Program
requirements for issuers (MQP Companies) and clear market quality
requirements for members (MQP Market Makers) that can only be effected
in a lit and highly regulated exchange environment.
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\42\ See Securities Exchange Act Release No. 53128 (January 13,
2006), 71 FR 3550 (January 23, 2006)(File No. 10-131)(order
approving registration of The NASDAQ Stock Market LLC as a national
securities exchange and adopting Rule 2460). FINRA, with whom the
Exchange has an agreement regarding provision of certain regulatory
services, has a similar provision in FINRA Rule 5250. As discussed,
the Exchange believes that FINRA intends to file an immediately
effective rule change that would exempt from FINRA Rule 5250
Exchange programs that are approved by the Commission.
\43\ IM reflects interpretive material to an Exchange rule.
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In the order approving NASD Rule 2460 (the 1997 order), upon which
NASDAQ Rule 2460 is based (as is FINRA Rule 5250), the Commission
discussed that NASD Rule 2460 preserved investor confidence, preserved
the integrity of the marketplace, and established a clear standard of
practice for member firms.\44\
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\44\ See Securities Exchange Act Release No. 38812 (July 3,
1997), 62 FR 37105 (July 10, 1997)(SR-NASD-97-29)(order approving
adoption of NASD Rule 2460). In discussing the 1997 order, the
Commission cited to NASD Notice to Members 75-16 (February 20,
1975); see also the letter from Kenneth S. Spirer, Attorney,
Division of Market Regulation, SEC, to Mr. Jack Rubens, Monroe
Securities, Inc. (May 4, 1973)(regarding acceptance of a fee or
service charge from issuers in connection with making a market). See
also Securities Exchange Act Release No. 39670 (February 25, 1998),
File No. S7-3-98, 63 FR 9661)(notice for public comment of proposed
amendments to Rule 15c2-11 under the Act in response to increasing
incidents of fraud and manipulation in the OTC securities market
involving thinly traded securities of thinly-capitalized issuers,
known as microcap securities)(the ``15c2-11 proposal''). In the
15c2-11 proposal, the Commission cited NASD Rule 2460 when
discussing that microcap fraud often involves ``pump and dump''
operations, in which unscrupulous brokers sell the securities of
less-seasoned issuers to retail customers by using high pressure
sales tactics and a supply of securities under the firm's control.
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The Exchange designed the MQP to meet the goals of market
integrity, investor confidence, and clear member standards as discussed
in the 1997 order. In particular, the Exchange designed the MQP to have
precise standards for all MQP Market Makers in the Program and to be
highly transparent with clear public notification requirements; with
clear entry, continuation, and termination requirements; with clear
Market Maker accountability standards; and, perhaps most importantly,
with clear market quality (liquidity) enhancement standards that
benefit investors and market participants. Additionally, NASDAQ has
ensured that issuers are unable to influence the selection or retention
of MQP Market Makers, or the amount of incentive credits that any
particular Market Maker receives from NASDAQ. The positive aspects of
the MQP are objective, clear and unambiguous.\45\
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\45\ In addition to the clear and unambiguous MQP market quality
standards promoting tighter markets and increased liquidity to the
benefit of market participants, it has been demonstrated that
already-established paid for market making programs in Europe have
resulted in a significant and sustained reduction in spreads. As an
example, securities that enjoyed PFMM in NASDAQ's First North's
market have spreads that are as much as four times narrower, and are
more stable, than securities without PFMM. See supra notes 31, 32,
and 33 and related text. Narrower spreads benefit investors by
lowering their transaction costs.
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First, the entire MQP is clearly and accurately set forth in
proposed Rule 5950. This includes the application and withdrawal
process, the listing fee and credit structure, the market quality
standards that an MQP Market Maker must meet and maintain to secure an
MQP Credit, and the Program termination process. Second, the Exchange
will provide notification on its public Web site regarding the variable
aspects of the Program. Specifically, this notification will include:
the names of the MQP Companies and the MQP Market Makers that are
accepted into the Program; how many MQP Securities an MQP Company may
have in the Program; the specific names of the MQP Securities that are
listed pursuant to the Program; the identity of the MQP Market Makers
in each MQP Security; and the amount of the supplemental MQP Fee, if
one is established by an MQP Company in addition to the basic MQP Fee,
as discussed below. Third, MQP Securities will be traded on a highly
regulated and transparent exchange, namely NASDAQ, pursuant to the
current trading and reporting rules of the Exchange, and pursuant to
the established market surveillance and oversight procedures of the
Exchange. And fourth, the MQP would encourage narrower spreads and
better market quality (more liquid markets) for securities that
generally have not been, or may not be, conducive to naturally having
such markets. The Exchange believes that these factors, which directly
benefit all market participants and investors, are instrumental to
developing strong investor confidence in the MQP and the integrity of
the market.
Moreover, the Exchange believes that the MQP does not implicate
conflicts of interest. That is, unlike the situation that the NASD was
trying to address in its Rule 2460 or NASD Notice to Members 75-16,
where issuers had the ability to directly pay a market maker to
illegally pump up the price of an issuer's stock, the proposed MQP does
not encourage MQP Market Makers to improperly pump up prices nor, for
that matter, establish any direct financial connection between MQP
Market Makers and MQP Companies. First, an MQP Company must go through
an MQP application process, and the Exchange must accept the MQP
Company into the Program, before an MQP Company can list a product
pursuant to the Program.\46\ Second, an MQP Market Maker must go
through a separate MQP application process, and the Exchange must
accept an MQP Market Maker into the Program, before an MQP Market Maker
can make a market in a product listed pursuant to the Program.\47\
NASDAQ will operate both of these application processes as an
independent regulator, preventing either issuers or market makers from
improperly influencing the ultimate outcome. Third, in terms of flow of
funds, the Program is constructed so that the only way that an MQP
Market Maker can earn an MQP Credit--the payment of which is
administered solely by the Exchange--is to maintain
[[Page 77147]]
a quality market in terms of the spread and liquidity of an MQP
Security.\48\ The Program does not afford any other way for an MQP
Market Maker to earn an MQP Credit. If an MQP Market Maker does not
earn an MQP credit, the MQP Fee remains in NASDAQ's General Fund.
Fourth, in contrast to the extensive benefits of the MQP, the
participation of an MQP Company in the Program is substantially limited
by design. In this regard, an MQP Company is limited to making only the
following determinations regarding the Program: whether to participate
in the Program; what MQP Security should be in the Program; when the
MQP Security should exit the Program; and the level of Supplemental
Fees, if any, that should be applied. The MQP Company can never choose
an MQP Market Maker, nor influence how, when, or the specific amount
that an MQP Market Maker receives as credit for making a market in an
MQP Security; these functions are performed solely by the Exchange
according to standards set forth in the Program.\49\ The Exchange
firmly believes that the clear, unambiguous, and transparent nature of
the Program and its established market quality standards are counter-
indicative of any inherent conflict of interest.\50\
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\46\ Moreover, an MQP Company approved to be in the Program must
meet both the non-MQP initial and continued listing standards (e.g.
Rules 5300, 5400, 5500) and the MQP initial and continued listing
standards to list a security pursuant to the MQP.
\47\ Moreover, an MQP Market Maker must be approved to be a
member on NASDAQ to be eligible for the MQP, and thereafter must
attain the general market making requirements (e.g. Rule 4613) and
the specific MQP market quality standards to be able to attain an
MQP Credit.
\48\ One of the eligibility criteria for an MQP Market Maker to
receive an MQP Credit, for example, is that the MQP Market Maker
must maintain at least 2,500 shares of attributable, displayed
posted liquidity on the NASDAQ Market Center that are priced no
wider on the offer side and no wider on the bid side than 2% away
from NBBO. Proposed Rule 5950(c)(1)(B).
Moreover, NASDAQ notes, regarding the flow of funds, that the
Exchange stands between an MQP Company and an MQP Market Maker; an
MQP Company cannot and does not, under any circumstances, directly
pay any funds to an MQP Market Maker.
\49\ Indeed, the Exchange will not pay an MQP Market Maker
pursuant to the Program for making a market in an MQP Security;
rather, the Exchange will pay an incentive out of its General Fund
if--and only if--an MQP Market Maker achieves very specific, rules-
based market quality objectives when otherwise making a market.
\50\ The Exchange notes that the MQP as proposed (e.g. fully
transparent and with clear market quality standards) would not be
susceptible to the ``pump and dump'' fraud and manipulation schemes
noted in the 15c2-11 proposal. See also supra note 36 discussing
that ETFs afford less opportunity for manipulation and that the ETF
trust structure acts as an insulating wall between market maker and
product.
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Additionally, the Exchange notes that the MQP is proposed initially
as a pilot program. This is significant for several reasons. First,
NASDAQ is proposing the pilot as an attempt to repair a gap in market
structure, namely the challenge of certain small or start-up securities
lacking access to quality markets with adequate liquidity.\51\ Second,
the Exchange has agreed, as part of the MQP pilot, to submit periodic
reports to the Commission about market quality in respect of the MQP.
These reports will endeavor to compare, to the extent practicable,
securities before and after they are in the MQP. The reports will
provide information regarding, for example, volume metrics, number of
MQP Market Makers in target securities, and spread size; and will help
the Commission and NASDAQ to evaluate the efficacy of the Program. The
Exchange will endeavor to provide similar data to the Commission about
comparable ETFs that are listed on the Exchange that are not in the
MQP. And third, if the Exchange desires to expand the pilot program or
make the MQP permanent, the Exchange will need to file a new proposed
rule change with the Commission.
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\51\ These securities may include less actively traded or less
well known ETF products that have less well known or start-up
companies as components.
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The Exchange believes that the MQP proposal would help raise
investor and issuer confidence in the fairness of their transactions
and the markets in general by enhancing market maker quote competition
in securities on the Exchange, narrowing spreads, increasing shares
available at the inside, reducing transaction costs, supporting the
quality of price discovery, and promoting market transparency.
Proposed Rule 5950--Securities Eligible for the MQP
The MQP is available to Companies \52\ that choose to list certain
MQP Securities on the Exchange. To be eligible for listing, MQP
Securities must meet the requirements to be listed on NASDAQ as an ETF
pursuant to Rule 5705.\53\ In addition, the MQP Security must meet all
NASDAQ requirements for continued listing during the period of time
that the MQP Security is in the MQP.\54\
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\52\ The term Company is defined in Rule 5005(a)(6).
\53\ See proposed Rule 5950(e)(1) and 5950(b)(1)(B).
\54\ Proposed Rule 5950(b)(1)(C).
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Proposed Rule 5950--Application and Withdrawal
The first step for an entity wishing to participate in the MQP by
listing a security on the Exchange, and for a Market Maker wishing to
participate in the MQP as an MQP Market Maker, is to submit an MQP
application to the Exchange.\55\ Once the Exchange determines that the
MQP Company and the MQP Market Maker are eligible to be in the MQP
according to the parameters of the proposed rule, the Exchange will
indicate acceptance to the MQP Company and the MQP Market Maker. NASDAQ
will provide notification on its Web site regarding acceptance of an
MQP Company, on behalf of an MQP Security, and an MQP Market Maker into
the Program.\56\ NASDAQ may, on a Program-wide basis, limit the number
of MQP Securities that any one MQP Company may have in the MQP; any
limitation would be uniformly applied to all MQP Companies.\57\ In
determining to limit the number of MQP Securities per MQP Company in
the MQP, NASDAQ may consider information that it believes will be of
assistance to it, such as whether a restriction, if any, is in the best
interest of NASDAQ, the MQP Company and the goals of the MQP, and
investors.\58\
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\55\ See Proposed Rule 5950(a). Thus for an MQP Company, on
behalf of an MQP Security, to participate in the Program, and for an
MQP Market Maker to be eligible to receive an MQP Credit for his
market making activities, the Exchange must have accepted the
application of each of these parties in respect of an MQP Security,
and the parties must each have fulfilled their obligations pursuant
to the MQP. Proposed Rule 5950 (b)(1) and (c)(1).
\56\ Proposed Rule 5950(a)(1)(C).
\57\ NASDAQ may also, on a Program-wide basis, limit the number
of MQP Market Makers permitted to register in an MQP Security.
NASDAQ will provide notification on its Web site of any such limit.
If a limit is established, NASDAQ will allocate available MQP Market
Maker registrations in a first-come-first-served fashion based on
successful completion of an MQP Market Maker application. Proposed
Rule 5950(c)(3).
\58\ Proposed Rule 5950 (a)(1)(A) and (B). Factors that may be
considered by the Exchange are set forth in subsection (a)(1)(B)(i)
and include, but are not limited to, the following: the current and
expected liquidity characteristics of MQP Securities; the projected
initial and continuing market quality needs of MQP Securities; and
the trading characteristics of MQP Securities (e.g. quoting,
trading, and volume).
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Moreover, to further enhance the transparency of the Program,
proposed Rule 5950(a)(1)(C) indicates that NASDAQ will also provide
notification on its Web site regarding the following: the total number
of MQP Securities that any one MQP Company may have in the Program; and
the names of MQP Securities that are listed on NASDAQ and the MQP
Market Maker(s) in each listed MQP Security, and the dates that an MQP
Company, on behalf of an MQP Security, commences participation in and
withdraws or is terminated from the Program.\59\
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\59\ See also proposed Rule 5950(a)(1)(C)(iv), whereby the
Exchange will include on its Web site a general statement about the
MQP that sets forth the potentially positive and negative aspects of
the Program.
And per proposed Rule 5950(b)(1)(D), during such time that an
MQP Company lists an MQP Security, the MQP Company must, on a
product-specific Web site for each product, indicate that the
product is in the MQP and provide the link to the Exchange's MQP Web
site.
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[[Page 77148]]
An MQP Company, on behalf of an MQP Security, and an MQP Market
Maker may choose to withdraw from the Program. After an MQP Company, on
behalf of an MQP Security, is in the MQP for six consecutive months but
less than one year, it may voluntarily withdraw from the MQP on a
quarterly basis. The MQP Company must notify NASDAQ in writing not less
than one month prior to withdrawing from the MQP. NASDAQ may determine,
however, to allow an MQP Company to withdraw from the MQP earlier.\60\
After an MQP Company, on behalf of an MQP Security, is in the MQP for
one year or more, it may voluntarily withdraw from the MQP on a monthly
basis. The MQP Company must notify NASDAQ in writing one month prior to
withdrawing.\61\ After an MQP Market Maker is in the MQP for not less
than one quarter, he may withdraw from the MQP on a quarterly basis.
The MQP Market Maker must, similarly to an MQP Company, notify NASDAQ
in writing one month prior to withdrawing.\62\
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\60\ In making this determination, NASDAQ may take into account
the volume and price movements in the MQP Security; the liquidity,
size quoted, and quality of the market in the MQP Security; and any
other relevant factors. Proposed Rule 5950(a)(2)(A).
\61\ Proposed Rule 5950(a)(2)(B).
\62\ Proposed Rule 5950(a)(2)(C). In addition, per proposed Rule
5950(a)(2)(D), NASDAQ will provide notification on its Web site when
it receives notification that an MQP Company, on behalf of an MQP
Security, or MQP Market Maker intends to withdraw from the Program,
and the date of actual withdrawal or termination from the Program.
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After an MQP Company, on behalf of an MQP Security, is in the MQP
for one year, the MQP and all obligations and requirements of the
Program will automatically continue on an annual basis unless NAQSAQ
terminates the Program by providing not less than one month prior
notice of intent to terminate or the pilot Program is not extended or
made permanent pursuant to a proposed rule change subject to filing
with or approval by the Commission under Section 19(b) of the Exchange
Act; the MQP Company withdraws from the Program pursuant to subsection
(a)(2) of this rule; or the MQP Company is terminated from the Program
pursuant to subsection (d) of Proposed Rule 5950.\63\
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\63\ Proposed Rule 5950(a)(2) and (a)(3). Proposed Rule 5950 (d)
states that the MQP will terminate in respect of an MQP Security
under the following circumstances:
(A) An MQP Security sustains an average daily trading volume
(consolidated trades in all U.S. markets) (``ATV'') of one million
shares or more for three consecutive months;
(B) An MQP Company, on behalf of an MQP Security, withdraws from
the MQP, is no longer eligible to be in the MQP pursuant to this
rule, or its Sponsor ceases to make MQP Fee payments to Nasdaq;
(C) An MQP Security is delisted or is no longer eligible for the
MQP;
(D) An MQP Security does not have at least one MQP Market Maker
for more than one quarter; or
(E) An MQP Security does not, for two consecutive quarters, have
at least one MQP Market Maker that is eligible for MQP Credit.
Moreover, subsection (d) states that MQP Credits remaining upon
termination of the MQP in respect of an MQP Security will be
distributed on a pro rata basis to the MQP Market Makers that made a
market in such MQP Security and were eligible to receive MQP Credit
pursuant to this rule; and that termination of an MQP Company, MQP
Security, or MQP Market Maker does not preclude the Exchange from
allowing re-entry into the Program where the Exchange deems proper.
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Proposed Rule 5950--MQP Fees
An MQP Company seeking to participate in the MQP shall incur an
annual basic MQP Fee of $50,000 per MQP Security. The basic MQP Fee
must be paid to NASDAQ prospectively on a quarterly basis.\64\
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\64\ Proposed Rule 5950(b)(2)(A).
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An MQP Company may also incur an annual supplemental MQP Fee per
MQP Security. The basic MQP Fee and supplemental MQP Fee when combined
may not exceed $100,000 per year. The supplemental MQP Fee is a fee
selected by an MQP Company on an annual basis, if at all. The
supplemental MQP Fee must be paid to NASDAQ prospectively on a
quarterly basis. The amount of the supplemental MQP Fee, if any, will
be determined by the MQP Company initially per MQP Security and will
remain the same for the period of a year. NASDAQ will provide
notification on its Web site regarding the amount, if any, of any
supplemental MQP Fee determined by an MQP Company per MQP Security.\65\
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\65\ Proposed Rule 5950(b)(2)(B).
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The MQP Fee is in addition to the standard (non-MQP) NASDAQ listing
fee applicable to the MQP Security and does not offset such standard
listing fee.\66\ NASDAQ will bill prospectively each MQP Company for
the quarterly MQP Fee for each MQP Security. MQP Fees (basic and
supplemental) will be credited to the NASDAQ General Fund.\67\
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\66\ Proposed Rule 5950(b)(2)(C). The MQP Fee in respect of an
ETF shall be paid by the Sponsor(s) of such ETF.
\67\ Proposed Rule 5950(b)(2)(D) and (E).
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Proposed Rule 5950--MQP Credit to Market Makers
When making a market in an MQP Security, an MQP Market Maker must,
in addition to fulfilling the market making obligations per Rule
4613,\68\ meet or exceed several market quality requirements on a
monthly basis to be eligible for an MQP Credit. First, for at least 25%
of the time when quotes can be entered in the Regular Market Session
\69\ as averaged over the course of a month, an MQP Market Maker must
maintain: a) at least 500 shares of attributable, displayed quotes \70\
or orders at the NBBO or better on the bid side of an MQP Security; and
b) at least 500 shares of attributable, displayed quotes or orders at
the NBBO or better on the offer side of an MQP Security. And second,
for at least 90% of the time when quotes can be entered in the Regular
Market Session as averaged over the course of a month, a MQP Market
Maker must maintain: (a) At least 2,500 shares of attributable,
displayed posted liquidity on the NASDAQ Market Center that are priced
no wider than 2% away from the NBBO on the bid side of an MQP Security;
and (b) at least 2,500 shares of attributable, displayed posted
liquidity on the NASDAQ Market Center that are priced no wider than 2%
away from the NBBO on the offer side of an MQP Security.\71\
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\68\ Rule 4613 states that market making obligations applicable
to NASDAQ members that are registered as Market Makers include,
among other things, quotation requirements and obligations as
follows: For each security in which a member is registered as a
Market Maker, the member shall be willing to buy and sell such
security for its own account on a continuous basis during regular
market hours and shall enter and maintain a two-sided trading
interest (``Two-Sided Obligation'') that is identified to the
Exchange as the interest meeting the obligation and is displayed in
the Exchange's quotation montage at all times. Interest eligible to
be considered as part of a Market Maker's Two-Sided Obligation shall
have a displayed quotation size of at least one normal unit of
trading (or a larger multiple thereof); provided, however, that a
Market Maker may augment its Two-Sided Obligation size to display
limit orders priced at the same price as the Two- Sided Obligation.
Unless otherwise designated, a ``normal unit of trading'' shall be
100 shares. After an execution against its Two-Sided Obligation, a
Market Maker must ensure that additional trading interest exists in
the Exchange to satisfy its Two-Sided Obligation either by
immediately entering new interest to comply with this obligation to
maintain continuous two-sided quotations or by identifying existing
interest on the Exchange book that will satisfy this obligation.
\69\ The term ``Regular Market Session'' shall have the meaning
given in Rule 4120(b)(4)(D). Proposed Rule 5950(e)(6).
\70\ These are quotes that are attributable to members and not
hidden quotes.
\71\ Proposed Rule 5950(c)(1)(B).
For example, regarding the first market quality standard (25%)--
in an MQP Security where the NBBO is $25.00 x $25.10, for a minimum
of 25% of the time when quotes can be entered in the Regular Market
Session as averaged over the course of a month, an MQP Market Maker
must maintain bids at or better than $25.00 for at least 500 shares
and must maintain offers at or better than $25.10 for at least 500
shares. Thus, if there were 20 trading days in a given month and the
MQP Market Maker met this requirement 20% of the time when quotes
can be entered in the Regular Market Session for 10 trading sessions
and 40% of the time when quotes can be entered in the Regular Market
Session for 10 trading sessions then the MQP Market Maker would have
met the requirement 30% of the time in that month.
For example, regarding the second market quality standard
(90%)--in an MQP Security where the NBBO is $25.00 x $25.10, for a
minimum of 90% of the time when quotes can be entered in the Regular
Market Session as averaged over the course of a month, an MQP Market
Maker must post bids for an aggregate of 2,500 shares between $24.50
and $25.00, and post offers for an aggregate of 2,500 shares between
$25.10 and $25.60. Thus, if there were 20 trading days in a given
month and the MQP Market Maker met this requirement 88% of the time
when quotes can be entered in the Regular Market Session for 10
trading sessions and 98% of the time when quotes can be entered in
the Regular Market Session for 10 trading sessions then the MQP
Market Maker would have met the requirement 93% of the time in that
month.
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[[Page 77149]]
MQP Credits for each MQP Security will be calculated monthly and
credited quarterly on a pro rata basis to one or more eligible MQP
Market Makers \72\ out of the Exchange's General Fund. Each MQP Credit
will be allocated 50% to a Quote Share Payment that is based on
Qualified Quotes, and 50% to a Trade Share Payment that is based on
Qualified Trades.\73\ Trade Share Payments will, as discussed, be based
upon the total aggregate share amount of Qualified Trades in an MQP
Security executed on the NASDAQ Market Center; \74\ and Quote Share
Payments will be based in equal proportions on: (a) Average quoted size
at or better than NBBO, and (b) average time spent quoting at or better
than NBBO.\75\
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\72\ NASDAQ may accept multiple MQP Market Makers into the
Program. Proposed Rule 5950(c)(1)(A).
\73\ Proposed Rule 5950(c)(2)(A). This subsection indicates that
a Qualified Quote represents attributable and displayed liquidity
(either quotes or orders) in an MQP Security; that a quote or order
entered by an MQP Market Maker in an MQP Security is only a
Qualified Quote if it is posted within 2% of the NBBO; and that a
Qualified Trade in an MQP Security represents a liquidity-providing
execution of a Qualified Quote on the NASDAQ Market Center.
\74\ Proposed Rule 5950(e)(4).
\75\ Proposed Rule 5950(c)(2)(B).
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An MQP Credit will be credited quarterly to an MQP Market Maker on
a pro rata basis for each month during such quarter that an MQP Market
Maker is eligible to receive a credit pursuant to the proposed rule.
However, the calculation to establish the eligibility of an MQP Market
Maker will be done on a monthly basis. Thus, for example, if during a
quarter an MQP Market Maker was eligible to receive a credit for two
out of three months, he would receive a quarterly pro rata MQP Credit
for those two months.\76\
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\76\ Proposed Rule 5950(c)(2)(C).
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NASDAQ may limit, on a Program-wide basis, how many MQP Market
Makers are permitted to register in an MQP Security, and will provide
notification on its Web site of any such limitation. As discussed
above, if a limit is established, NASDAQ will allocate available MQP
Market Maker registrations in a first-come-first-served fashion based
on successful completion of an MPQ Market Maker application.\77\
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\77\ Proposed Rule 5950(c)(3). See also supra note 57.
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Finally, to give the Exchange and the Commission an opportunity to
evaluate the impact of the MQP on the quality of markets in MQP
Securities, the Exchange is proposing that the MQP will be effective
for a one year pilot period. During the pilot period, the Exchange will
submit monthly reports to the Commission about market quality in
respect of the MQP. The monthly reports will endeavor to compare, to
the extent practicable, securities before and after they are in the MQP
and will include information regarding the MQP such as: (1) Rule 605
metrics; \78\ (2) volume metrics; (3) number of MQP Market Makers in
target securities; (4) spread size; and (5) availability of shares at
the NBBO. The Exchange will endeavor to provide similar data to the
Commission about comparable ETFs that are listed on the Exchange that
are not in the MQP; and any other MQP-related data requested by the
Commission for the purpose of evaluating the efficacy of the MQP. The
Exchange will post the monthly reports on its Web site.
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\78\ 17 CFR 242.605.
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The first report will be submitted within sixty days after the MQP
becomes operative.
The Exchange will issue to its members an information bulletin
about the MQP prior to operation of the Program.
Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of targeted securities (including ETFs)
on the Exchange during all trading sessions, and to detect and deter
violations of Exchange rules and applicable federal securities laws.
Trading of the targeted MQP Securities through the Exchange will be
subject to FINRA's surveillance procedures for derivative products
including ETFs.\79\ The Exchange may obtain information via the
Intermarket Surveillance Group (``ISG'') from other exchanges that are
members or affiliates of the ISG; \80\ and from listed MQP Companies
and public and non-public data sources such as, for example, Bloomberg.
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\79\ FINRA surveils trading on the Exchange pursuant to a
Regulatory Services Agreement (``RSA''). The Exchange is responsible
for FINRA's performance under this RSA.
\80\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
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2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\81\ in general, and with
Sections 6(b)(4) and 6(b)(5) of the Act,\82\ in particular, in that it
provides for the equitable allocation of reasonable dues, fees and
other charges among members and issuers or Companies and other persons
using any facility or system which NASDAQ operates or controls, and it
is designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market, and, in general, to protect investors and the public interest.
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\81\ 15 U.S.C. 78f.
\82\ 15 U.S.C. 78f(b)(4) and (5).
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The goal of the MQP--to incentivize members to make high-quality,
liquid markets--supports the primary goal of the Act to promote the
development of a resilient and efficient national market system.
Congress instructed the Commission to pursue this goal by emphasizing
multiple policies, including the promotion of price discovery, order
interaction and competition among orders and markets. The MQP promotes
all of these policies; it will enhance quote competition, improve
NASDAQ liquidity, support the quality of price discovery, promote
market transparency and increase competition for listings and trade
executions while reducing spreads and transaction costs. Maintaining
and increasing liquidity in exchange-listed securities executed on a
registered exchange will help raise investors' confidence in the
fairness of the market and their transactions. Improving liquidity in
this manner is particularly important with respect to ETFs and low-
volume securities, as noted by the Joint CFTC/SEC Advisory Commission
on Emerging Regulatory Issues.\83\
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\83\ See Recommendations Regarding Regulatory Responses To The
Market Events Of May 6, 2010, February 18, 2011 (Recommendation that
the SEC evaluate whether incentives or regulations can be developed
to encourage persons who engage in market making strategies to
regularly provide buy and sell quotations that are ``reasonably
related to the market.''). Available at http://www.sec.gov/spotlight/sec-cftcjointcommittee/021811-report.pdf.
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Each aspect of the MQP adheres to and supports the Act. First, the
Program promotes the equitable allocation of fees and dues among
issuers. The MQP is completely voluntary in that it will provide an
additional means by which issuers may relate to the Exchange without
modifying the existing listing options. Issuers can supplement the
standard listing fees (which have already been determined to be
consistent with the Act) with those of
[[Page 77150]]
the MQP (which are consistent with the Act as well). While the MQP will
result in higher fees for issuers that choose to participate, the
issuers receive significant benefits for participating, including
greater liquidity, and lower transaction costs for their investors.
Additionally, issuers will have the ability to withdraw from the
Program after an initial commitment in the event they determine that
participation is not beneficial. In that case, the withdrawing issuers
will automatically revert to the already-approved fee schedule
applicable to the market tier in which their shares are listed.
The MQP also represents an equitable allocation of fees and dues
among Market Makers. Again, the MQP is completely voluntary with
respect to Market Maker participation in that it will provide an
additional means by which members may qualify for a credit, without
eliminating any of the existing means of qualifying for incentives on
the Exchange. Currently, NASDAQ and other exchanges use multiple fee
arrangements to incentivize Market Makers to maintain high quality
markets or to improve the quality of executions, including various
payment for order flow arrangements, liquidity provider credits, and
NASDAQ's Investor Support Program (set forth in NASDAQ Rule 7014).
Market Makers that choose to undertake increased burdens pursuant to
the MQP will be rewarded with increased credits; those that do not
undertake such burdens will receive no added benefit. As with issuers,
Market Makers that choose to participate in the MQP will be permitted
to withdraw from it after an initial commitment if they determine that
the burdens imposed by the MQP outweigh the benefits provided.
Additionally, the MQP establishes an equitable allocation of MQP
Credits among Market Makers that choose to participate and fulfill the
obligations imposed by the rule. If one Market Maker fulfills those
obligations, the MQP Credit will be distributed by NASDAQ to that
Market Maker out of the General Fund; and if multiple Market Makers
satisfy the standard, the MQP Credit will be distributed pro rata among
them. In other words, all of the benefit of the MQP Credits will flow
to high-performing Market Makers, provided that at least one Market
Maker fulfills the obligations under the proposed rule.
The MQP is designed to avoid unfair discrimination among Market
Makers and issuers. The proposed rule contains objective, measurable
(universal) standards that NASDAQ will apply with care. These standards
will be applied equally to ensure that similarly situated parties are
treated similarly. This is equally true for inclusion of issuers and
Market Makers, withdrawal of issuers and Market Makers, and termination
of eligibility for the MQP. The standards are carefully constructed to
protect the rights of all parties wishing to participate in the Program
by providing notice of requirements and a description of the selection
process. NASDAQ will apply these standards with the same care and
experience with which it applies the many similar rules and standards
in NASDAQ's rule manuals.
In contrast to the extensive benefits of the MQP, the participation
of an MQP Company in the Program is substantially limited by design. In
this regard, an MQP Company is limited to making only the following
determinations regarding the Program: whether to participate in the
Program; what MQP Security should be in the Program; when the MQP
Security should exit the Program; and the level of Supplemental Fees,
if any, that should be applied. The MQP Company can never choose an MQP
Market Maker, nor influence how, when, or the specific amount that an
MQP Market Maker receives as credit for making a market in an MQP
Security; these functions are performed solely by the Exchange
according to standards set forth in the Program.\84\
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\84\ Indeed, the Exchange will not pay an MQP Market Maker
pursuant to the Program for making a market in an MQP Security;
rather, the Exchange will pay an incentive out of its General Fund
if--and only if--an MQP Market Maker achieves very specific, rules-
based market quality objectives when otherwise making a market.
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NASDAQ notes that it operates in a highly competitive market in
which market participants can readily favor competing venues if they
deem fee levels at a particular venue to be excessive, or rebate
opportunities available at other venues to be more favorable. In such
an environment, NASDAQ must continually adjust its fees and program
offerings to remain competitive with other exchanges and with
alternative trading systems that have been exempted from compliance
with the statutory standards applicable to exchanges. NASDAQ believes
that all aspects of the proposed rule change reflect this competitive
environment because the MQP is designed to increase the credits
provided to members that enhance NASDAQ's market quality.
Finally, NASDAQ notes that the proposed paid for market making
system has been used successfully for years on NASDAQ OMX Nordic's
First North market. The First North paid for market making system has
been quite beneficial to market participants including investors and
listing companies (issuers) that have experienced market quality and
liquidity with narrowed spreads. The Exchange believes that the
proposed MQP will similarly enjoy positive results to the benefit of
investors in MQP Securities and Companies related to them and the
financial markets as a whole.
B. Self-Regulatory Organization's Statement on Burden on Competition
NASDAQ does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. To the contrary,
NASDAQ believes the MQP program is pro-competitive in that it will
increase competition in both the listings market and in the transaction
services market. The MQP will promote competition in the listings
market by advancing NASDAQ's reputation as an exchange that works
tirelessly to develop a better market for all issuers, and for
partnering with issuers to improve the quality of trading on NASDAQ. In
fact, the MQP is itself a response to the competition provided by other
markets that are developing similar programs, including NYSE Arca and
BATS. NASDAQ fully expects that other listing venues will respond to
the MQP by further enhancing their listings market offerings.
The MQP promotes competition in the transaction services market by
creating incentives for market makers to make better quality markets.
As market makers strive to attain the quality standards established by
the MQP, the quality of NASDAQ's quotes will improve. This, in turn,
will attract more liquidity to NASDAQ and further improve the quality
of trading of MQP stocks. Again, if the MQP is successful in its goals,
NASDAQ fully expects that competing markets will respond by creating
incentives of their own to improve the quality of their markets and to
attract liquidity to their markets.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such
[[Page 77151]]
longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the Exchange consents, the Commission
shall: (a) By order approve or disapprove such proposed rule change, or
(b) institute proceedings to determine whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. The Commission previously received
comments on SR-NASDAQ-2012-043, which proposed rule change was
withdrawn by the Exchange,\85\ and all such comments are available on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml.)
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\85\ See supra note 3.
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Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2012-137 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2012-137. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Section, 100 F Street
NE., Washington, DC 20549-1090, on official business days between 10:00
a.m. and 3:00 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NASDAQ-2012-137 and should
be submitted on or before January 22, 2013.
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\86\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\86\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-31410 Filed 12-28-12; 8:45 am]
BILLING CODE 8011-01-P